NS&I to cut Premium Bond prize rate to 4% – are they still worth it?

It's the second cut to the prize-fund rate in two months, after NS&I announced that the rate would drop to 4.15% for the December draw. However, the odds of winning will remain the same at 22,000 to one – we've detailed how the distribution of prizes is changing below.

The changes mean the prize-fund rate will fall even further behind the savings pack. For example, it's possible to get up to 5.18% with easy-access cash ISAs or up to 4.85% with standard easy-access savings.

It's also important to note that most people with typical luck won't actually get a return of 4%, even with the maximum £50,000 invested. The reason behind this is quite complex – see below, or check out 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 5.18%, you'd get £51.80 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 4.15% or 4%, 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

Thanks to the personal savings allowance, basic-rate taxpayers can earn £1,000 (and higher-rate taxpayers £500) in savings interest tax-free.

With today's top standard easy-access rate of 4.85%, it takes just over £20,600 in savings for basic-rate taxpayers to exceed the allowance and start paying tax on the interest (and just over £10,300 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 are still likely to be the better choice for many. The top easy-access cash ISA rate is currently 5.18%, a bit higher than the top standard savings rate and substantially higher than the current Premium Bond prize-fund rate of 4.15% (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.

However, if you've 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-fund rate – this is what's decreasing from 4.15% to 4% in January. 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, £4.15 (soon to be £4 from 1 January 2025) 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 January 2025:

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

Separately, NS&I has announced that from Friday 20 December, the interest rate on NS&I's Direct Saver will be cut to 3.5% AER, down from 3.75% AER, while the rate on its Income Bonds will fall to 3.49% AER, down from 3.75% AER%. These changes will apply to both new and existing customers.

See our Top savings guide for full info on alternatives.