Premium Bonds warning: Blow for savers as NS&I announces cut to interest rate from January

The prize fund will reduce to four per cent, down from 4.15 per cent and will maintain the odds of winning at 22,000 to one, despite the rate cut, the Government-backed savings provider said.

Laura Suter, director of personal finance at AJ Bell, notes that NS&I has "joined the troops of other savings providers cutting interest rates, as the savings market cools after a bonanza couple of years."

The changes include an estimated 82 prizes of £100,000 in January, down from 83 in December. There will be an estimated 166 prizes of £50,000 in January, down from 167 in December. The estimated number of £1 million prizes will remain the same, at two.

There will be a higher number of lower-value prizes of £25 in January, estimated at 1,815,854, up from 1,509,458 in December.

A Freedom of Information request obtained by AJ Bell has revealed a striking statistic: two-thirds of Premium Bond holders have never won a prize. This equates to approximately 14.4 million people who have yet to see any return on their Premium Bond investments.

The data shows that among the 5.3 million holders who did win prizes between June 2023 and May 2024, the average holding was £23,047. Notably, 80 per cent of winners secured multiple prizes during this period.

In contrast, those who didn't win had an average holding of just £175, indicating that smaller investments are significantly less likely to yield returns. These figures suggest that success with Premium Bonds is heavily weighted towards those with larger holdings.

Andrew Westhead, NS&I retail director, said: “We carefully review our savings rates in response to changes in the broader market. These adjustments help us meet our net financing target while balancing the interests of our savers, taxpayers and the wider financial services sector.

With NS&I's rates now falling significantly below market leaders, savers face a crucial decision about their investments.

Suter warned: "The rates are now significantly below the top rates in the market, meaning savers are paying a decent premium for the safety and brand name of NS&I. Anyone with money in easy-access NS&I accounts should weigh up whether they would be better switching to a rival to clinch some extra interest.

“Savers with money in Premium Bonds should really think about whether the account is right for them. Considering many Premium Bond holders will never will a prize and the average expected return is lower than the top easy-access account, savers could well be better off with a guaranteed return elsewhere."

NS&I added that from December 20 the interest rate for its Direct Saver will reduce to 3.5 per cent AER (annual equivalent rate) and Income Bonds to 3.49 per cent AER. Both are reducing from 3.75 per cent.

Despite recent rate cuts, Premium Bonds remain popular due to their Government backing and strong brand loyalty among savers. However, experts suggest most people would benefit more from the security of regular interest rates.

Premium Bonds remain attractive for specific groups of savers such as higher-rate taxpayers who can benefit from the tax-free nature of Premium Bond prizes, particularly significant as interest rates rise.

For those in the highest tax bracket paying 45 per cent on savings income, or savers who have exceeded their Personal Savings Allowance, Premium Bonds offer valuable tax advantages.

The product also appeals to those willing to gamble on winning larger prizes, including the monthly £1million jackpot.

However, potential gamblers should note that winning chances increase with larger holdings.