NS&I cuts Premium Bond rate to 4.15% – are they still worth it?

It's the second time this year the Premium Bond prize-fund rate has been lowered, following eight successive raises between December 2020 and January 2024. The odds of winning will also get worse from 1 December 2024, changing from the current 21,000 to one to 22,000 to one – see below for more detail on how the distribution of prizes is changing.

The changes mean the prize-fund rate will fall even further behind the savings pack. For example, it's possible to get up to 5.1% with easy-access cash ISAs or up to 5% with easy-access savings, and 4.87% if you lock your savings away in a one-year fix. See our Top cash ISAs and Top savings guides for more.

It's also important to note that most people with typical luck won't actually get a return of 4.15%, 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 cut 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 cash ISA rate of 5.1%, you'd get £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 this isn't correct. You're actually likely to get quite a lot less than the prize rate of 4.4% or 4.15%, and there's a negligible chance of winning a million.

If you know and accept 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 comparatively very low.

With today's top easy-access rate of 5%, it now takes £20,000 in savings for basic-rate taxpayers to exceed the personal savings allowance and start paying tax on the interest (£10,000 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%, slightly higher than the top savings rate and noticeably higher than the current Premium Bond prize-fund rate at 4.4% 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 – this is what's decreasing from 4.4% currently to 4.15% in December. 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, £4.40 (soon to be £4.15 from 1 December 2024) is paid out every year in prizes. But although the prizes include two £1 million payouts and other big prizes, many win far less.

Below is a breakdown of how the number of prizes awarded is estimated to change from December 2024:

NS&I will also cut rates on some of its savings products

Separately, NS&I has announced the launch of new two-year British Savings Bonds – the guaranteed growth bond pays 4.10% AER (down from the previous rate of 4.25% AER), while the guaranteed income option pays 4.09% AER (also down from a previous 4.25% AER). These are available from today (Wednesday 22 October) but can be beaten, as we've outlined above. The top two-year fix elsewhere, for example, pays 4.6%.

Additionally, from Wednesday 20 November, the interest rate on NS&I's Direct Saver will be cut to 3.75% AER, down from 4% AER, while the rate on its Income Bonds will fall to 3.75% AER, down from 4% AER%. These changes will apply to both new and existing customers.

See our Top savings guide for full info on alternatives.