The prize fund rate for Premium Bonds will decrease from 4.15% to 4% from the January 2025 draw, with the odds remaining at 22,000 to one. This follows a cut from 4.4% to 4.15% for the December 2024 draw which will take place next week.
From Friday 20 December 2024, the interest rate for NS&I’s Direct Saver will decrease from 3.75% to 3.50% gross/AER, and Income Bonds from 3.69% to 3.44% gross/3.49% AER.
Andrew Westhead, NS&I retail director, said: “We carefully review our savings rates in response to changes in the broader market. These adjustments help us meet our net financing target while balancing the interests of our savers, taxpayers and the wider financial services sector.
“Premium Bonds remain a popular choice for millions of savers, backed by the 100% Government guarantee, with the January 2025 draw set to deliver over 5.8 million tax-free prizes worth more than £431m.”
Is it still worth buying Premium Bonds?
Savers with money in Premium Bonds should really think about whether the account is right for them.
Wellness and wellbeing holidays: Travel insurance is essential for your peace of mind
Out of the pandemic lockdowns, there’s a greater emphasis on wellbeing and wellness, with
Sponsored by Post Office
A previous Freedom of Information request obtained by AJ Bell reveals that two-thirds of Premium Bond holders, equivalent to just under 14.4 million people, have never won a prize.
The average holding for the 5.3 million Premium Bond holders who won a prize between June 2023 and May 2024 sat at £23,047, with 80% of those who won winning more than once during that period.
Over the 12 months to May 2024 the average holding of someone not winning was £175, showing that those with very small balances are unlikely to win.
Laura Suter, director of personal finance at AJ Bell, said: “Despite recent interest rate cuts, these accounts are still likely to continue to be very popular as they are backed by NS&I and many savers have huge brand loyalty to the organisation.
“There are a few groups where Premium Bonds are a very attractive option, but for most the safety of a regular interest rate will be better and savers may want to shop around for the best rates on offer.”
Who might Premium Bonds still be suitable for
Higher-rate savers
Premium Bonds’ big selling point used to be that any money you win in prizes is tax free. That’s still the case, but since the introduction of the Personal Savings Allowance most people haven’t had to worry about tax on their savings income anyway. The allowance means that basic-rate taxpayers can earn £1,000 interest on their savings before they pay tax, while higher-rate taxpayers can earn £500.
Suter said: “As interest rates have risen more people will start to hit this allowance. Assuming their cash was in the current top-paying easy access savings account earning 4.85%, a basic-rate taxpayer would need to have £20,600 in savings to breach their tax-free allowance, while a higher-rate taxpayer would only need to have £10,300.
“On top of that, anyone who is in the highest rate tax bracket gets no savings allowance, and so will pay 45% tax on any of their savings income. For these highest earners, or those who have already breached their allowance, the tax-free nature of Premium Bonds becomes far more attractive.”
Gamblers
The Premium Bond indicative rate is based on the average chance of winning a prize in the draw each month. However, for all those people who never win anything, there will be someone who wins the top £1m prize.
Anyone in this camp needs to be aware that they could win nothing, and so get no return on their money. Equally, your chances of winning depend on how much you hold in Premium Bonds. So, someone with £100 saved is much less likely to win than someone who has £20,000.
People who are very risk-averse
Another big appeal of Premium Bonds is that they are run by the Government, so they are seen as the safest-of-safe places to keep your money.
But, everyone is protected by the Financial Services Compensation Scheme (FSCS), which covers up to £85,000 of money per person, per financial institution. This means that your money is theoretically as safe in any other bank with FSCS protection as it is with Premium Bonds.
Suter said: “However, because NS&I is Government-run it can’t go bust, whereas a bank could go bust and then you’d have to reclaim your money through the compensation scheme. It’s a marginal difference but some people will feel much safer with their savings being with the Government.”