The prize fund rate for Premium Bonds has been cut again
Premium Bonds savers who have been disappointed by the prize fund rate dropping again this month may see a change in their fortunes. NS&I reduced the rate from 4% to 3.8% starting April, following rate cuts in January and in December last year.
However, they might increase the rate again as they try to meet Government financing targets. Matthew Parden, CEO and co-founder of savings provider Marygold & Co., shed light on why there could be a shift in the prize fund rate’s direction. He stated: “The recent Spring Statement announced that the NS&I had been assigned a net financing target of £12billion for this tax year, which is higher than the previous year’s target of £9billion.
“This means that the NS&I has been asked to raise more money for the Treasury, much of which is from Premium Bonds. This might result in NS&I needing to be more competitive in the savings market and offer better rates.” However, the finance expert believes that the rate will likely continue to fall.
Mr Parden said: “However, it’s possible that the Premium Bonds rate or the odds of winning could continue to decrease, especially if economic conditions remain tough. While a further reduction in the prize fund rate is likely, as base rates are expected to reduce, it’s unlikely to be drastic in the short term.
“If the rate continues to fall, the odds of winning may also decline, as fewer winners would be able to share the reduced prize pool.” The likelihood of winning a prize for each £1 Bond is currently 22,000 to one, with each Bond being entered into the monthly draw with an equal chance to win a prize, which range from £25 up to the £1million jackpots.
Even amidst declining interest rates, Mr Parden believes Premium Bonds may still appeal to certain savers. He said: “Premium Bonds suit individuals who are risk-averse but still want the opportunity to win tax-free prizes, without the risk of losing their initial investment.
“They are particularly suitable for savers who have a longer-term outlook, as the Bonds may not provide regular returns, but rather the chance of a one-off win. Premium Bonds also appeal to those who do not need immediate access to their funds and are comfortable with the possibility of receiving no return at all in a given month.”
Players are allowed to invest up to £50,000 into Premium Bonds, and can set up their accounts to automatically invest any winnings back into purchasing more Bonds. For savers planning to withdraw from Premium Bonds, Mr Parden advises considering savings products that offer steadier returns.
He set out some of the options on the market: “High-interest savings accounts, which offer better interest rates than Premium Bonds, could be more suitable for those who prefer regular returns. Fixed-rate bonds, where the interest rate is guaranteed for a set period, are also a good alternative for savers who can afford to lock away their money.”
Premium Bonds holders benefit from their prizes being completely tax-free, which is a significant advantage for those lucky enough to win substantial cash rewards, such as a £1million jackpot or other large sums such as £100,000 and £50,000. For savers worried about potential tax implications on their earnings, Mr Parden recommends considering an alternative.
He said: “For those seeking tax-free options, ISAs (Individual Savings Accounts) could be a good choice, offering higher rates with the added benefit of being tax-efficient. For longer-term growth, stocks and shares ISAs might be worth considering, though they come with higher risk.” Any interest earned or investment growth in ISAs is untaxed.
