MSE News

NS&I cancels planned Premium Bond rate cut

NS&I cancels planned Premium Bond rate cut

The Premium Bond prize rate is to remain at 1.4%, after NS&I announced today it is cancelling the rate cut it had planned in May, in order to "support savers during the coronavirus pandemic".

Back in February, National Savings and Investments (NS&I) unveiled plans for a raft of rate cuts across its savings products, which were due to come into force next month.

These included cutting the Premium Bond prize rate from 1.4% to 1.3% – which would have resulted in 170,000 fewer prizes being won in May than in February – as well as reducing interest rates on a range of savings products.

But NS&I has now cancelled the reduction in the Premium Bond prize rate, as well as the cuts to its variable-rate savings products. Planned interest rate cuts on its fixed-rate savings products will still go ahead on Friday 1 May – though if you have one of these products currently, you won't see any change until your fix is up.

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.

'With the 1.4% tax-free savings rate staying, are Premium Bonds now the best savings on the market?'

Responding to the announcement, Martin Lewis, founder of MoneySavingExpert.com, said: "Even a headline rate of 1.4% tax-free on the Premium Bond prize fund doesn't make it a no-brainer for savers. While state-owned NS&I is known as a bastion of savings safety, unless you've more than £85,000 saved, the protection you get isn't materially better than a normal UK regulated savings account.

"Nor is the tax-free element an advantage for most. Since 2016, the personal savings allowance has meant that basic 20% rate taxpayers can earn £1,000 a year interest in any savings account tax-free (higher 40% rate taxpayers get £500). That means less than one person in 20 has enough savings to pay tax on them.

"Then let's compare rates. While it's a smidgeon higher than the top easy-access accounts at 1.25%, it's lower than the top one-year fix at 1.6% – and that's a fair comparison, as most people put money in Premium Bonds for the longer term (quite rightly, as it makes no sense for just a few months).

"However, even then the Premium Bond prize fund rate isn't the same as an interest rate. If you put £1,000 in it, you won't get £14 back – you can't. In fact, with that amount over a year, statistically most people will earn nothing. Just less than half will win £25 or more.

"According to our Premium Bond Probability Calculator, those with smaller amounts and typical luck (technically based on the median average) are unlikely to win more than the top easy-access accounts over a year. To do that, you'd need to have closer to the maximum £50,000 in – and even then, statistically you'd need better-than-typical luck to win close to the interest from the top one-year fix savings.

"So based on pure financial logic, Premium Bonds don't win for most. But if you are happy to have a little bit of a flutter and enjoy this, then at the moment, with the rate riding relatively high, it's far from the worst thing to do with cash."

'The rate cut reversal provides relief for savers, to mitigate the rate cuts'

Martin Lewis added: "The suite of rate cut reversals by NS&I provides welcome relief for millions of savers with money in these accounts.

"Normally, NS&I isn't supposed to use its unique market position as a state-owned institution to provide competition-busting deals. Likely the Government has agreed to this for two reasons.

"Firstly, NS&I's role is to raise money for the state, and with the huge expenditure needed for coronavirus support schemes, this is one of the ways it can do that. Plus I suspect there's a policy element here, that with the Bank of England base rate being cut to 0.1%, those who've prudently put money away in savings are being kicked in the teeth – so being able to keep one savings rate high at least mitigates that a touch."

What are Premium Bonds?

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 now remaining at 1.4%. That'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.

NS&I's cancellation of its Premium Bond prize rate cut means each £1 bond will still have a one in 24,500 chance of winning any prize (under the planned changes, a £1 bond would only have had a one in 26,000 chance of winning any prize).

See our Premium Bonds guide for full info on how it works.

What other rate cuts have been cancelled?

As well as keeping the Premium Bond prize rate at 1.4%, NS&I has also cancelled planned rate reductions to its variable-rate savings products:

Cancelled rate reductions on variable savings products

Product Current rate (now staying in place) Planned rate reduction (now cancelled)
Direct Saver 1% 0.7%
Investment Account 0.8% 0.6%
Income Bonds 1.15% gross/1.16% AER 0.7%

If you have one of these accounts and have had a letter or notification from NS&I about your interest rate dropping, you can now ignore this as the rate drop won't be going ahead.

Which savings products WILL still see rates cut?

Though NS&I has cancelled its proposed changes to Premium Bonds and the variable-rate savings products listed above, its planned rate cuts on its fixed-term products – which were announced at the same time in February – will still be going ahead.

It's important to understand if you currently have one of these fixed-term products you WON'T see any change until after your fixed-term period is up. But the change will kick in when your account matures if you decide to renew when your current term expires.

The lower rates will apply from 1 May 2020 if you choose to renew at a different length (eg, going from a two-year fix to a five-year fix). But if you automatically renew on to a new issue with the same term, the lower rates will only apply from 2 June 2020. (These products aren't available for new customers.)

Here's how rates are changing:

Interest rate changes on NS&I's fixed-term products

Product Current rate New rate (1)
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%

(1) These will apply from 1 May 2020 if you renew at a different length, or from 2 June 2020 if you automatically renew on to a new issue with the same term.

What does NS&I say?

NS&I says that "the cancellation of these interest rate reductions will support savers during the coronavirus pandemic", adding that customers don't need to take any action as a result of the announcement.

It's also urging customers to use its online services where possible to free up capacity for its contact centre during the pandemic, and to only send anything by post if they have no other choice.