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NS&I to slash savings rates and Premium Bond prizes

NS&I to slash savings rates and Premium Bond prizes

National Savings & Investments (NS&I) will dramatically cut the interest it pays on many of its savings accounts in November, slashing its top easy-access rate to just 0.01%. And Premium Bond holders will also have a much lower chance of winning a prize from December, with the prize rate to be cut to 1%.

The surprise announcement is a huge blow to savers, many of whom have turned to NS&I as savings rates have plunged during the pandemic. NS&I's Income Bonds, which currently pay 1.16% AER, have often topped our easy-access savings best buys in recent months, while in June we reported that savings in Premium Bonds had hit a 14-year record.

Here's a quick summary of the key NS&I rate cuts:

  • Variable savings rates – including ISAs – will be slashed from 24 November 2020. NS&I's Income Bonds account, which has often topped our easy-access savings best buys in recent months, is plummeting from 1.16% to just 0.01% AER, while the Direct Saver account will drop from 1% to 0.15% AER. Its Junior ISA will pay just 1.5% AER, down from 3.25%, while the Direct ISA will drop from 0.9% to 0.1% AER.

  • Some fixed savings rates will also be cut from 24 November 2020. A range of accounts will see rates drop sharply – see full details below. For example, NS&I's one-year Guaranteed Growth Bonds will drop from 1.1% to just 0.1% AER, while its one-year Guaranteed Income Bonds are being slashed from 1.06% to 0.06% AER. But you won't be affected during the term of your account, and will only see the rate drop if you choose to renew.

  • The Premium Bond prize rate will drop from 1.4% to 1% in December. 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. But from the December 2020 Premium Bond prize draw, the odds will be lowered to 1 in 34,500, with over one million fewer prizes set to be given out in December than in September.

NS&I had planned to cut the Premium Bonds prize rate to 1.3% earlier this year, but it cancelled the reduction – as well as planned cuts to its variable savings products – to support savers during the pandemic. However, the upcoming cuts go much further than the reductions planned for earlier this year, with NS&I saying the new rates will be more in line with those offered by other banks and building societies.

For more on how to get the best interest rate for your savings, including our current top picks, see our Top Savings Accounts guide. And for full help on Premium Bonds – including how they work and whether they're worth it – see our Premium Bonds guide.

Savings rate dropping? Ditch and switch to beat the cuts

NS&I has announced deep cuts to its variable and some fixed-rate savings, with 15 products in total affected.

  •  Here's a full breakdown of how rates will change from 24 November 2020:

    How are NS&I's savings rates changing? 

    Product Current rate Rate from 24 November 2020
    Direct Saver 1% 0.15%
    Investment Account 0.8% 0.01%
    Income Bonds 1.15% gross / 1.16% AER 0.01%
    Direct ISA 0.9% 0.1%
    Junior ISA  3.25% 1.5%
    Guaranteed Growth Bonds (1 year) 1.1% 0.1%
    Guaranteed Growth Bonds (2 year) 1.2% 0.15%
    Guaranteed Growth Bonds (3 year) 1.3% 0.4%
    Guaranteed Growth Bonds (5 year) 1.65% 0.55%
    Guaranteed Income Bonds (1 year) 1.05% gross / 1.06% AER 0.06%
    Guaranteed Income Bonds (2 year) 1.15% gross / 1.16% AER 0.11%
    Guaranteed Income Bonds (3 year) 1.25% gross / 1.26% AER 0.36%
    Guaranteed Income Bonds (5 year) 1.6% gross / 1.61% AER 0.51%
    Fixed Interest Savings Certificates (2 year) 1.15% 0.1%
    Fixed Interest Savings Certificates (5 year) 1.6% 0.5%

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 24 November 2020. Yet you don't need to wait until then to ditch and switch to a better rate.

Though NS&I's Income Bonds account has often been market-leading at 1.16% AER over the past months, it can now be beaten by Coventry Building Society, which pays 1.2% AER variable (you can open the account online with £1, but will be limited to two withdrawals per year). See our top easy-access savings for more info. 

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 November to move your cash – you can switch to a top-paying account straightaway.

If you have a fixed-rate account – which applies to the Growth Bonds, Income Bonds and Savings Certificates – you won't see any immediate change. But here's how you'll be affected:

  • If your account matures on or before 24 November 2020 and you automatically renew on to 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 24 November 2020.

  • If your account matures after 24 November 2020 and you renew on to a new issue, you'll receive the lower interest rate (regardless of whether the term is the same length).

NS&I's fixed-rate savings accounts can also be beaten by a top fixed savings account. For example, you could earn up to 1.3% by locking your cash away for a year compared to NS&I's 1.1% (0.06% from November).

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.

Once rates drop, NS&I rates will also be beaten by the current market-leading ISAs, where you never pay tax on the interest you earn. These generally pay less than top savings accounts – at the moment, you could earn up to 0.96% AER with an easy-access ISA or 1.02% for a two-year fix – but can be a decent option for the minority of savers who pay tax on their savings. See our Top Cash ISAs guide for more info.

Premium Bonds prize rate dropping – are they worth it?

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%. 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 (and soon £1) is paid out every year in prizes. Yet as the prizes include two £1 million payouts and other big prizes, many also win far less – see our Premium Bonds guide for full info on how it works.

  • 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. In September 2020, 3,856,040 prizes were won – but this is expected to drop to 2,850,256 in December 2020 when the prize rate is reduced.

    Here's a full breakdown of how the number of prizes is expected to change in December:

    Number of Premium Bond prizes

    Value of prizes Number of prizes in September 2020 Expected number of prizes in December 2020
    £1,000,000 2 2
    £100,000 7 4
    £50,000 14 9
    £25,000 28 16
    £10,000 71 43
    £5,000 140 83
    £1,000 2,204 1,639
    £500 6,612 4,917
    £100 30,244 26,637
    £50 30,244 26,637
    £25 3,786,474 2,790,269
    Total 3,856,040 2,850,256

Though the rate cut will be disappointing to Premium Bond holders, 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 1.2%, you'd get roughly £12 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. Plus with the Premium Bond prize rate dropping sharply, from December it may be LESS than the top easy-access savings rate (depending on how savings rates change over the next few months).

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 could beat the returns you get from normal savings with bonds.

Many people often think: "I'm likely to get about 1.4% – soon to be 1% – and there's a small chance of winning a million". But the main point is that this isn't correct. You're actually likely to get quite a lot less than 1.4%/1%, and there's a negligible chance of winning a million. If you know and you're OK with this, then investing in Premium Bonds isn't a bad plan. For full info, see our Premium Bonds – are they worth it? guide.

What does NS&I say?

NS&I chief executive Ian Ackerley said: "Reducing interest rates is always a difficult decision. In April, we cancelled interest rate reductions announced in February and scheduled for 1 May.

"Given successive reductions in the Bank of England base rate in March, and subsequent reductions in interest rates by other providers, several of our products have become 'best buy' and we have experienced extremely high demand as a consequence.

"It is important that we strike a balance between the interests of savers, taxpayers and the broader financial services sector, and it is time for NS&I to return to a more normal competitive position for our products."