Millions of savers will see their tax-free Premium Bonds return less each year, after today’s news that National Savings & Investments (NS&I) will reduce the interest rate paid on these popular accounts.
The UK’s 22 million Premium Bond investors don’t actually get interest on their savings, in the way a typical savings account works, but are eligible to win prizes each month of between £25 and £1 million.
However, NS&I has announced it will be cutting the prize fund rate from 1.5% to 1.3% from 1st August 2013; lengthening the odds of a single £1 Premium Bond winning a prize from 1 in 24,000 to 1 in 26,000.
The change will see the total value of prizes distributed each month fall from £57 million £49 million. The largest reduction will be in the number of £50 and £100 prizes, which will fall from over 30,000 each month to around 11,000.
Why have Premium Bond rates been reduced?
NS&I is backed by the Treasury and is set an annual Net Financing target, which is has to meet. Over the past few months interest rates on other types of savings account have fallen dramatically, making Premium Bonds look more attractive. The decision to reduce the chances of winning a prize, and therefore cut the return paid to savers, has been taken to make Premium Bonds look less attractive, with the aim of ultimately reducing the amount of money investors hold in them.
The news is not unexpected, only last month NS&I announced it would be cutting the interest rate on Income Bonds from September and Index Linked Certificates have not been available for new investments for over a year.
Premium Bonds are possibly the most popular type of savings account in the UK, with savers attracted by the tax-free returns, the capital guarantees, as well as the chance of winning the £1 million jackpot each month.
However, critics point out that that effective rate of interest is well below the current rate of inflation, guaranteeing most savers a real terms loss each year.
Commenting on the change Jane Platt, Chief Executive of NS&I, said: “Rates across the savings market have fallen over recent months, resulting in NS&I savings being increasingly attractive. To ensure we stay within our Net Financing target – and in light of our framework to balance the needs of our savers, taxpayers and the stability of the broader financial services sector – we now need to reduce the Premium Bond prize fund rate.” (Source: NS&I)
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