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Another big Premium Bonds boost for September’s draw

Paloma Kubiak
Written By:
Paloma Kubiak

Interest rates on NS&I’s variable products will increase in August while Premium Bonds holders will have more chance of winning from September’s prize draw.

The Government’s savings arm has confirmed that the Premium Bonds prize fund rate will increase from 4% to 4.65% in September.

This would have taken it to joint first place in the best buy easy access savings account category, but digital challenger Tandem has today become the market-leader paying 5% AER.

However, Premium Bonds aren’t like normal savings accounts as they don’t pay interest. Instead, the interest that should be paid is used to fund the monthly prize draw.

The latest prize fund rate increase takes it to the highest level in 24 years – since March 1999 – adding £66m to the prize fund.

Further, the odds of winning will also improve from 22,000-to-one to 21,000-to-one, meaning each £1 bond will have the best chance of being drawn since April 2008.

All-in-all, it means an extra 269,000 prizes next month with an estimated prize pot of £470m. There will be 5.78 million prizes up for grabs in September, including more prizes worth £100,000 to £50, and less £25 wins. There will still be the same two £1m winners.

NS&I chief executive, Dax Harkins, said: “These upcoming increases show that we’re supporting savers up and down the country. Premium Bonds are one of the nation’s favourite savings products, so increasing the prize fund rate to its best level since 1999 and improving the odds means that more people will have the chance to win prizes each month.”

Variable savings account rate increases

In addition to the Premium Bonds changes, NS&I confirmed that from Friday 18 August, it will increase interest rates on variable products.

This means the Direct Saver will pay 3.65% gross/AER (up from 3.4%), while Income Bonds will increase to 3.59% gross/3.65% AER from 3.4% gross/3.45% AER.

The rate paid on NS&I’s Direct ISA will increase to 3% tax-free from 2.4% tax-free. Young savers will also benefit, with the rate that NS&I pays on its Junior ISA increasing to 4% gross tax-free from 3.65% tax-free.

Meanwhile, the interest rate on the Investment Account will rise to 1% from 0.85%.

Harkins added: “These rate increases will help ensure that our savings products remain attractive to customers, whilst ensuring that we continue to balance the needs of savers, taxpayers and the broader financial services sector.”

Laura Suter, head of personal finance at AJ Bell, said: “It was inevitable that NS&I would increase rates as rising competition in the savings market means it has fallen out of favour with savers who would prefer guaranteed rates elsewhere. In June, NS&I clocked up its third month of falling inflows and actually saw no net inflows, as any money savers put with the provider was wiped out by withdrawals. Taking a punt on Premium Bonds was a more attractive gamble when interest rates were rock bottom. But now savers are giving up returns of 5% on easy-access accounts for the chance they might win big on ERNIE, which is a tougher call to make.

“The rates on a whole host of other NS&I accounts are also increasing, but none of them are market-beating. That means to be using NS&I you’d need to have another motivation other than getting the highest possible return. For some, this will be the higher protection than the Financial Services Compensation Scheme offers or the ability to shelter their savings from tax.”

In June, it was predicted that NS&I rate rises would be slowed or stopped altogether as it overshot its funding target by £1bn in the 2022/23 tax year. Since then, it has raised rates on products twice, contrary to the views initially shared by experts.

Related:  The best savings and ISA accounts this week and Value of unclaimed Premium Bonds prizes tops £80m: How to check if you’re a winner.