NS&I cut Premium Bond rates – are they still worthwhile?

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National Savings & Investments (NS&I) has slashed the rates on its Premium Bonds, marking another blow for Britain’s savers.

From December 2020, the Premium Bond prize fund interest rate will fall from 1.4% to just 1.0%, meaning the odds of winning drop from 1 in 24,500 to 1 in 34,500.

Two lucky people will still win the top £1 million prize each month, but there will be fewer chances of winning lower prizes. Just four people will win £100,000 as opposed to seven people currently, and only nine people will win £50,000, down from 14 currently.

It’s disappointing news for the millions of people who have bought Premium Bonds, and it also means it’s even harder to get a good return on cash.

So, does this mean Premium Bonds are no longer worthwhile? Or do they still hold value?

What are Premium Bonds?

Premium Bonds have been around since 1956 and roughly 23 million people in the UK hold bonds.

They’re unlike other savings and investment products because, instead of earning interest or receiving dividend income, you’re entered into a monthly prize draw.

Premium Bonds have a ‘rate’, but this isn’t to be confused with an interest rate. The rate is used to calculate the prize fund for the monthly draws.

The only way you can make money is if you win a prize. If your bond number is drawn, you can win a lump sum of between £25 and £1 million.

You can boost your chances of winning by buying more bonds. You can invest from £25 up to a maximum of £50,000.

What are the benefits of Premium Bonds?

The main attraction of Premium Bonds is the possibility of winning a big prize. There’s a small chance you could become a millionaire overnight, although the odds of this happening with a £1 bond are around 1 in 47 billion.

Some other benefits include:

  • Winnings are tax-free
  • Premium Bonds are backed by the government, so your money is secure
  • You can withdraw your money at any time without incurring charges
  • You can automatically reinvest prizes to boost your chances of winning again.

Many people simply like the ‘fun’ factor of Premium Bonds and look forward to the start of each month when the prizes are announced.

How does the new 1% rate stack up?

Although the Premium Bond rate cut is disappointing, it’s not nearly as severe as the cuts on some other NS&I accounts.

From 24 November, NS&I will slash the monthly rate on their Income Bonds from 1.15% to a measly 0.01% – that’s just £1 in interest for every £10,000 invested.

NS&I’s Direct Saver will pay just 0.15%, down from 1% currently, and its Direct ISA rate will fall from 0.9% to 0.1%.

The rate on Premium Bonds is also higher than on most traditional instant-access savings accounts.

However, as we mentioned earlier, the Premium Bond rate isn’t actually an interest rate, so it’s difficult to make a meaningful comparison. For people who don’t win anything, the rate is effectively zero.

What are the disadvantages of Premium Bonds?

The main drawback of investing in Premium Bonds is you might not win a prize, especially if you’ve only invested a small amount of money. The odds of winning anything will be just 1 in 34,500 come December.

If you don’t win, you won’t see any returns on your investments at all. In fact, your money could fall in value over time because it won’t keep up with inflation.

In a nutshell, Premium Bonds could make you a millionaire, or inflation could shrink your savings.

What should I do if I hold Premium Bonds?

The rate cut is a useful opportunity to review your Premium Bonds and decide whether they’re still suitable for your financial needs and goals.

Even with the rate cut, it could be worth keeping your Premium Bonds if:

  • You’ve invested a lot of money – the more bonds you own, the bigger your chance of winning a prize
  • You pay tax on savings interest and you’ve used up your annual ISA allowance (currently £20,000)
  • You enjoy the excitement of a prize draw.

Get in touch

If you’d like to discuss Premium Bonds – or any other savings and investments – with a financial planner, please get in touch. We will review your Premium Bond holdings alongside your wider finances to advise you on the best course of action.

For help with your investment planning, email enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.

Please note

The Financial Conduct Authority does not regulate NS&I products.

 

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