Premium Bonds rate hike sees them ‘beat’ easy access savings deals: Are they worth considering?
The Premium Bonds prize fund rate will rise from 3% to 3.15% in February’s draw, the fourth hike in a year by National Savings & Investments (NS&I).
It comes after the prize fund rate was last increased in January from 2.2% to 3%, with the latest boost taking it to its highest level in over 14 years.
With the prize fund rate coming in at 3.15% tax-free next month, this means it currently beats the top-paying easy access savings rate of 3%.
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 a monthly prize draw.
NS&I – the Government’s savings arm – confirmed the odds of winning will remain the same at 24,000-to-one.
However, as part of next month’s draw, the number of prizes worth £50 to £100,000 will increase, while the number of £25 prizes will fall. There’s no change for the life-changing sum as just two people will win the £1m jackpot prize as now.
In total, the estimated value of prizes for February comes in at £314.3m with nearly five million prizes up for grabs (worth between £25 and £1m).
So, with the upcoming changes, are Premium Bonds worth considering?
Premium Bonds prize fund rate and odds of winning
Laura Suter, head of personal finance at AJ Bell, said the Premium Bonds ‘prize fund rate’ is intended to give savers some comparison with how it compares to normal savings accounts. But she said it could be “misleading for many savers”, as they might assume this is the average return they will get if they hold the Premium Bonds for a number of years.
Suter said: “In reality, the ‘effective rate’ is the average return you would get based on having average luck in the prize draw. Clearly not everyone has ‘average’ luck, otherwise the prizes would be handed out equally to every saver. The fact there are some very large prizes also skews the figures – as it means that for every person who wins £1 million or £100,000 there will be hundreds who win nothing.
“What that 3.15% figure means is that for every £100 held in Premium Bonds £3.15 is paid out of the prize fund, but clearly a few people will win the big prizes and thousands will get nothing each year. Anyone buying Premium Bonds needs to be prepared to get zero return on their money – although of course they could win that life-changing £1 million prize.”
For Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, the prize fund rate hike is part of NS&I’S “cunning plan” to entice more savers into Premium Bonds.
She said: “This is a canny response to inflation. With rapid price rises on all sides, £25 is unlikely to feel quite as rewarding as it did a year ago. By adding so many more £50 and £100 prizes it means more people are winning sums that feel like they will make a difference.
“Increasing the bigger prizes, meanwhile, builds on January’s move to introduce more life-changing sums of money. At the moment, when money is so tight for so many, the idea of winning a prize that will make an enormous difference to people’s lives is incredibly attractive. Premium Bonds offer them the unique chance to get their hands on this sort of cash – with their money back if they lose.”
However, she warns: “If you’re considering Premium Bonds, it’s worth being aware that winning a major sum is still a vanishingly small possibility. And that while the odds of a win of any size is still 24,000 to one, it still means that in an average month, the average saver will win nothing.”
Meanwhile, Myron Jobson, senior personal finance analyst at Interactive Investor, said Premium Bonds can be “fun lottery-style alternatives” to easy access savings account.
“But the fact remains that while some savers might be lucky enough to hit the jackpot or win big early on, others may save and wait for long periods for even a small return.
“Those who can afford to put money away for five years or more should consider investing for the potential of inflation beating returns that far outstrips savings rates.”
On this point, Suter added: “While lots of people are drawn in by the Government-backing and the tax-free nature of Premium Bonds, the majority of people would likely be better off opting for a standard savings account and getting a guaranteed interest. The top easy-access savings account currently pays 3% but you can get more interest with fixed and notice accounts.”
Increases to other NS&I savings accounts
NS&I also announced changes to the rates offered on its other savings accounts, held by more than 870,000 customers. The Direct Saver and Income Bonds interest rate has increased to 2.6%, from 2.3% from today. This is the highest rate seen since 2010 and 2008 on these accounts respectively.
The rate on its Direct ISA has also risen to 2.15% tax-free, from 1.75%, the highest rate paid since 2013.
The rise to the NS&I Junior ISA to 3.4% for 80,000 under-18s also means it enters the best buy tables in this category, though a higher 3.8% is offered by Coventry Building Society.
NS&I chief executive, Ian Ackerley, said: “Today’s changes will provide a welcome boost for savers of all ages across the country, with more Premium Bonds prizes and some of the highest interest rates we’ve seen in over a decade.
“In a fast-changing savings market, we’re committed to making sure our products remain competitive and our customers get a good return on their savings. Today’s changes ensure that we continue to balance the needs of savers, taxpayers and the broader financial services sector.”