MSE News

Premium Bond prize rate to be cut to 1.3%

Premium Bond prize rate to be cut to 1.3%

Premium Bond holders will have a lower chance of winning a prize from May, while those with NS&I savings products will see their interest rates cut.

At the moment, the prize rate for Premium Bonds is 1.4% – so each £1 bond has a 1 in 24,500 chance of winning any prize. From 1 May 2020, this prize rate will be cut to 1.3%, meaning the chance of a £1 bond winning any prize will be lowered to 1 in 26,000.

Over 170,000 fewer prizes are set to be given out in May 2020 than in February as a result, with less than half the number of £100 and £50 prizes expected to be awarded.

It's also bad news for those with other savings products from NS&I – which has 25 million customers and is backed by the Treasury – as interest rates are set to be cut across both fixed and variable rate savings products from May.

For more on how Premium Bonds work – and whether they're worth it – see our Premium Bonds guide. And for more info on the best interest rates for your savings, see our Top Savings Accounts guide.

What are Premium Bonds and how are they changing?

Premium Bonds are effectively a savings account you can put money into, where instead of being paid interest, tax-free prizes are awarded in a monthly prize draw – meaning there's no guarantee you'll get any return on your money. Prizes range from £25 to a whopping £1 million.

The nearest thing Premium Bonds have to an interest rate is their annual prize rate, which is what's dropping from 1.4% to 1.3% in May. It's a benchmark of the 'average' return you'll get for your money – though in reality, there's no guarantee you'll win anything at all.

What it really means is that for every £100 invested in Premium Bonds across the market, £1.40 is paid out every year in prizes. Yet the prizes include two £1 million payouts, and many prizes for £100s or £1,000s – meaning lots of people have to win far less than this prize rate. See our Premium Bonds guide for full info on how it works.

In February 2020, 3,471,112 prizes were won – but this is expected to drop to 3,297,394 in May 2020 when the prize rate is reduced.

While the number of £1 million prizes up for grabs is expected to stay the same, there will be fewer available prizes for all other amounts. Here's a breakdown of how the number of prizes is expected to change in May:

Number of Premium Bond prizes

Value of prize Number of prizes in February 2020 Expected number of prizes in May 2020
£1,000,000 2 2
£100,000 6 5
£50,000 12 11
£25,000 23 21
£10,000 59 54
£5,000 119 106
£1,000 1,984 1,857
£500 5,952 5,571
£100 27,221 13,448
£50 27,221 13,448
£25 3,408,513 3,262,871
Total 3,471,112 3,297,394

Are Premium Bonds worth it?

Though disappointing to Premium Bond holders, in practical terms the rate cut isn't likely to make a huge difference to how worthwhile Premium Bonds are – for most savers, they're not worth it even before the reduction.

If you have average luck and don't pay tax on savings interest, putting your cash into savings is likely to be the better bet.

This is because savings pay a constant rate of interest – so if you get the top current easy-access savings rate of 1.35%, you'd get roughly £13.50 interest for every £1,000 saved. Though this rate is variable, it provides more certainty than Premium Bonds, where many saving the same £1,000 would win nothing.

The main advantage of Premium Bonds is that prizes are always tax-free (they're also backed by the Government, meaning your money's fully protected – though savings held with any UK-regulated institution are also protected up to £85,000).

95% of people don't pay any tax on savings interest due to the personal savings allowance, so the fact that winnings are tax-free won't make a difference to them. But if you're one of the 5% of people who pay tax on interest, and you hold a lot of Premium Bonds, they may be worth it.

For this group, tax-free cash ISAs will likely beat normal savings and Premium Bonds, but if you've maxed your £20,000/year ISA allowance and you hold a lot of Premium Bonds, you've a decent chance of beating the returns you get from normal savings with bonds.

For full info, see our Premium Bonds  are they worth it? guide.

How are savings products changing?

NS&I has also announced interest rate reductions across its savings products from 1 May 2020. Here's a full breakdown of how the rates are changing:

How are NS&I's interest rates changing?

Product Current rate Interest rate from 1 May 2020
Direct Saver 1%  0.7% 
Investment Account 0.8%  0.6% 
Income Bonds 1.15% gross / 1.16% AER 0.7% 
Guaranteed Growth Bonds (1 year) 1.25% 1.1%
Guaranteed Growth Bonds (2 year) 1.45% 1.2%
Guaranteed Growth Bonds (3 year) 1.7% 1.3%
Guaranteed Growth Bonds (5 year) 2% 1.65%
Guaranteed Income Bonds (1 year)  1.2% gross / 1.21% AER 1.05% gross / 1.06% AER
Guaranteed Income Bonds (2 year) 1.4% gross / 1.41% AER 1.15% gross / 1.16% AER
Guaranteed Income Bonds (3 year) 1.65% gross / 1.66% AER 1.25% gross / 1.26% AER
Guaranteed Income Bonds (5 year) 1.95% gross / 1.97% AER 1.6% gross / 1.61% AER
Fixed Interest Savings Certificates (2 year) 1.3% 1.15%
Fixed Interest Savings Certificates (5 year) 1.9% 1.6%

If you have a variable rate account – which applies to the Direct Saver, Investment Account and Income Bonds –you'll see your interest rates drop straightaway from 1 May 2020.

If you have a fixed rate account – which applies to the Growth Bonds, Income Bonds and Savings Certificates – you won't see any change, at least until your account matures. At this point:

  • If your account matures on or before 1 June 2020 and you automatically renew onto a new issue with the same term, you'll receive the current – higher – interest rate for the length of the term on the new account.

    But if you choose to renew to a new issue that has a term of a different length, you'll receive the lower interest rate from 1 May 2020.

  • If your account matures after 1 June 2020 and you renew onto a new issue, you'll receive the lower interest rate (regardless of whether the term is the same length).

How to max your savings interest

While the reductions to interest rates are a further blow for NS&I savers, the current rates can already be beaten by the top-paying savings accounts on the market.

For example, NS&I pays up to 1% on its variable rate accounts, dropping to a maximum of 0.7% from May – but you can boost your earnings to up to 1.35% by moving your cash to a top-paying easy-access savings account.

And as you can withdraw money from NS&I variable rate accounts without giving notice or paying a penalty, you don't need to wait until May to move your cash – you can switch to a top-paying account straightaway.

NS&I's fixed rate savings accounts can also be beaten by a top fixed savings account – you could earn up to 1.65% by locking your cash away for a year compared to NS&I's 1.25% (1.1% from May), for example.

You won't be able to withdraw money during the term of these accounts though, so it's important to diarise when your term comes to an end so you can move your cash.

NS&I also says it will write to all holders of Growth Bonds, Income Bonds and Savings Certificates 30 days before their accounts are set to mature.

What does NS&I say?

NS&I chief executive Ian Ackerley said: "Reducing interest rates is always a difficult decision. We need to ensure our interest rates are set at an appropriate position against those of our competitors. These changes reflect NS&I's requirement to strike a balance between the needs of our savers with taxpayers and the stability of the broader financial services sector.

"We believe our new rates offer our customers a fair return and the assurance of the 100% HM Treasury guarantee on all their holdings with NS&I."