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Blow for millions of savers as NS&I forges ahead with premium bond prize cuts

Written by: Paloma Kubiak
National Savings & Investments (NS&I) will cut interest rates on its variable ISA, saving and bond products, and the prize fund rate for its popular Premium Bonds will also be reduced from Monday.

NS&I – the government’s savings arm – will forge ahead with changes to Premium Bonds, Direct ISA, Direct Saver and Income Bonds, which will come into effect on 1 May 2017.

Premium Bonds are not like normal savings accounts as they don’t pay interest. Instead the interest that should be paid (currently 1.25% tax-free) is used to fund a monthly prize draw. This prize fund rate will fall to 1.15% tax-free from Monday.

This is the second time in a year the prize fund rate has been cut. The last cut from 1.35% to 1.25% took effect on 1 June 2016.

The total value of prizes will also fall from £69.5m to an estimated £63.8m, while the total number of prizes will also be reduced from 2,224,513 to 2,219,493.

There are no changes to the current odds of winning; it stands at 30,000-to-one, a drop from 26,000-to-one from last June.

The other key changes are:

  • Direct ISA: falling from 1.00% tax-free/AER to 0.75% tax-free/AER
  • Direct Saver: falling from 0.80% gross/AER to 0.70% gross/AER
  • Income Bonds: falling from 1.00% gross/AER to 0.75% gross/AER.

At the time of the announcement in February, NS&I said it had taken the time to “absorb the impact of the Bank of England base rate reduction and subsequent changes across the savings market” since August last year.

Best buys

Earlier this month, the highly-anticipated government-backed savings bond paying 2.2% for three years launched. The NS&I Investment Guaranteed Growth Bond gives online savers the opportunity to put away between £100 and £3,000, and earn up to £66 a year or up to £202 over the investment period. While it is a market-leading offer, the 2.2% rate falls below the current 2.3% inflation rate.

According to Moneyfacts data, the current top-paying variable rate ISA is offered from Hinckley & Rugby Building Society at 1.20% (120 day notice cash ISA, minimum £500).

The best easy access savings account currently on the market according to Moneyfacts is from Yorkshire Building Society, offering 1.15% on a minimum £100 investment.

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