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Blow for savers as NS&I cuts premium bond prizes

Written by: Paloma Kubiak
National Savings & Investments (NS&I) is cutting interest rates on four of its variable rate products including its Premium Bonds and savings accounts as a result of the base rate reduction last year.

NS&I – the government’s savings arm – has today announced variable rate changes to its Premium Bonds, Direct ISA, Direct Saver and Income Bonds which will come into effect on 1 May 2017.

Premium Bonds aren’t 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 May.

This is the second time in less than 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 2,225,513 to 2,219,493.

There are no changes to the current odds of winning; it stands at 30,000-to-one, cut 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.

NS&I said it has 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.

Steve Owen, acting chief executive of NS&I, said: “The new rates reflect current market conditions and allow us to continue to strike a balance between the needs of our savers, taxpayers and the stability of the broader financial services sector.

“We appreciate that savers will be disappointed, but we believe that the new rates present a fair offer to customers, who will continue to benefit from our 100% HM Treasury guarantee on all holdings, as well as tax-free prizes for Premium Bonds.”

From spring, NS&I will launch Investment Guaranteed Growth Bonds, market-leading three-year savings bonds paying 2.2% on up to £3,000 for those aged 16 and over. However, it said this is an “indicative interest rate”, and the precise rate will be confirmed nearer to launch.

‘Devastating blow for millions of savers’

Danny Cox, chartered financial planner at Hargreaves Lansdown, said: “This comes as little surprise but this cut in interest rates is another devastating blow for millions of savers and the new launch of Investment Guaranteed Growth Bonds will be of little compensation. Ironically with so little interest on cash for savers, Premium Bonds look more attractive – if your savings are returning basically nothing, you might as well opt for the chance of the jackpot prize.

“NS&I will remain popular for their cast iron security but lower interest rates and rising inflation will test savers’ patience and I expect more people to look to the stock markets for some of their cash to improve their long term returns.”

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