NS&I to cut Premium Bond prize rate to 4.4% – are they still worth it?
NS&I will decrease its Premium Bond prize-fund rate to 4.4% from 4.65% for its March 2024 draw and beyond. But this rate was already lagging behind interest rates on standard savings accounts – so if you're a bondholder, you may now want to consider moving your cash to an interest-paying account.
This is the first time the Premium Bond prize-fund rate has been lowered since December 2020, having been raised eight times since then. However, the odds of winning will remain the same at 21,000 to one – see below for more detail on how the distribution of prizes is changing.
The change means the prize-fund rate will fall even further behind the savings pack. It's possible to get up to 5.13% with easy-access savings, and 5.16% if you lock your savings away in a one-year fix. See our Top savings guide for more.
It's also important to note that most people with typical luck won't actually get a return of 4.4%, even with the maximum £50,000 invested. The reason behind this is quite complex – see below, as well as our Premium Bonds guide for a full explanation.
The rate decrease makes Premium Bonds even easier to beat elsewhere
For most savers with average luck, and who don't pay tax on savings interest, normal savings will now be even more likely to beat Premium Bonds. This is because savings give you a guaranteed return in the form of interest – so if you get the top easy-access rate of 5.13%, you'd get roughly £51 in interest a year for every £1,000 saved.
Though this interest rate can go up and down over time, you know exactly what you'll earn at any given point – so it still provides more certainty than Premium Bonds, where many saving the same £1,000 would win nothing.
Many people often think "I'm likely to get the prize rate (or thereabouts) – 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 the prize rate of 4.65% or 4.4%, 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 guide.
Premium Bond prizes are tax-free – though cash ISAs will likely win for most
Despite the dip in savings rates we've seen in recent months, the amount you need in savings before you start to pay tax on it is still around the lowest point it's been since the personal savings allowance was introduced in 2016.
With today's top easy-access rate of 5.13%, it now takes a little over £19,000 in savings for basic-rate taxpayers to exceed the personal savings allowance and start paying tax on the interest (£9,500 for higher-rate taxpayers). So the fact that Premium Bond prize winnings are tax-free is a boon for some.
Yet tax-free cash ISAs will still likely be the better choice for many. The top easy-access cash ISA rate is currently 5.1%, noticeably higher than the current Premium Bond prize-fund rate at 4.65% and with a guaranteed return on your savings. So if you've enough in savings to exceed your personal savings allowance (or you will soon), cash ISAs will likely beat both normal savings and Premium Bonds.
There is one group who may still benefit from Premium Bonds, however. If you have large savings, have maxed out your £20,000 a year ISA allowance, and you've enough left over to exceed your personal savings allowance in normal savings, Premium Bonds could give you a better return (if you're lucky).
A brief breakdown of the complex maths behind Premium Bonds
Premium Bonds are essentially a savings account you can put money into, where instead of being paid interest, tax-free prizes are awarded in a monthly draw. Prizes range from £25 to £1 million.
The nearest thing Premium Bonds have to an interest rate is their annual prize rate, which is what's decreasing from 4.65% currently to 4.4% in March. 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, £4.65 (soon to be £4.40 from 1 March 2024) is paid out every year in prizes. But as the prizes include two £1 million payouts and other big prizes, many also win far less.