The underlying rate on Premium Bonds could be set for another chop, depending on net financing targets outlined for National Savings and Investments in the Budget tomorrow.
NS&I’s fundraising targets were frozen at the Autumn Statement last November, as the Treasury-backed bank announced it had hit its fundraising target for the year with an excess of £2.3billion, raking in £9.8billion from savers in the six months leading up to November 2023.
This ultimately led to the Premium Bonds prize fund being cut in January from 4.65 per cent to 4.4 per cent, which became effective rate in the prize draw on 1 March 2024.
But depending on NS&I targets – the amount of cash it aims to pull in versus withdrawals – this may not be the last time savers see the prize rate fall in the coming months, experts say.
Chancellor Jeremy Hunt could announce changes to NS&I fundraising targets which could see the Premium Bonds prize fund change
What are the outcomes for the prize fund?
If the Chancellor deviates from this year’s target of £7.5billion – plus or minus £3 billion – savers can expect savings rates to move.
NS&I has a balancing act to perform. It needs to raise enough money for the Treasury as cost-effectively as possible.
It’s expected to offer a decent deal for savers, and it tries not to disrupt the rest of the savings market by offering anything significantly better than the going rate.
This is what happened with NS&I’s 6.2 per cent one-year fixed rate bonds, which were launched in August 2023 and pulled from the market in October 2023.
Savings experts agree that NS&I’s 6.2 per cent deal threw the one-year fixed rate bond market off kilter.
Much of the £9.8billion NS&I raised in 2023 arrived from savers who ploughed into its bumper 6.2 per cent one-year fixed-rate deal.
If the Chancellor announces a higher target for NS&I this year, and needs to raise more cash, there will be greater scope for higher rates on savings products, a higher Premium Bond prize fund, or putting one-year bonds back on sale.
If the target is cut and it needs to raise less, rates will come down, because cost-effectiveness becomes a higher priority.
James Blower, founder of website Savings Guru says: The amount saved in Premium Bonds jumped by £0.5billionn in February and is up over £3billionn in the past year. If this was to continue, there is little justification for a further rate reduction unless the funding target for NS&I is to be reduced substantially in the budget on Wednesday.’
This could spell bad news for Premium Bond savers, who could see the underlying rate slashed.
‘If the target is similar target to this year, savers can expect the Premium Bond prize rate to hold steady in the short term,’ says Sarah Coles, of investment platform Hargreaves Lansdown.
Blower says: ‘If the funding target is somewhere around £5 to 8billionn then I can’t foresee any changes to Premium Bonds in the next month or two.’
This would mean NS&I would not need to raise rates or add more prizes to raise money to meet its fundraising target.
‘However, given expectations that the Bank of England will start cutting rates in the coming months, this isn’t going to last forever. The next move for these bonds is likely to be a cut,’ Coles adds.
Coles says: ‘More than 24 million savers will be hanging onto Jeremy Hunt’s every word for good news on Premium Bonds in this week’s Budget.
‘They suffered a cut to the prize fund this month, and need know whether this is the last of the bad news, or just the start.’
Are Premium Bonds still worth it if the prize fund is cut?
Premium Bonds are the UK’s most popular savings product.
Many savers like the thrill of finding out if they have won a prize in the draw each month.
Unlike other savings products, Premium Bonds don’t have a guaranteed interest rate.
Instead, you have the opportunity to win tax-free cash prizes of between £25 and £1 million every month in the prize draw.
The annual rate on Premium Bonds is now 4.4 per cent.
It indicates the average return you’ll get for your money, but in reality you may not win any prizes at all in a given month.
Coles says: ‘When you’re weighing up your options, the risk of cuts needs to be added to the fact that prizes aren’t guaranteed.
‘In the March draw, with £25 of bonds, your chances of winning the jackpot were just under one in over 2.5 billion.
‘In an average year, the average person holding £1,000 in bonds will win nothing.’
The best-easy access account now pays 5.16 per cent – and This is Money has an exclusive partnership with Raisin* this week, which means savers can get a best buy 5.22 per cent on a £10,000 pot (see the fact box above).
