With two Premium Bonds rate cuts in two months… are they still worth it?

More than 22million savers hold National Savings and Investments Premium Bonds in the hope of winning a big prize in the monthly draw. 

Monthly prizes range from £25 to £1million and there are two of the coveted jackpot prize, which savers dream they will win. . 

But NS&I dealt a hammer blow to Premium Bonds savers by announcing two cuts to the Premium Bonds prize fund rate in as many months.

The prize fund rate represents the average return a Premium Bonds saver would get in a year,

The Treasury-backed bank had not even applied its first prize fund cut to the December draw before announcing another cut from January 2025.

The prize fund rate is being cut to 4 per cent from 4.15 per cent from the January draw.

It comes just a month after NS&I announced it would cut the prize fund to 4.15 per cent from 4.4 per cent in the December draw, on Monday. 

It means that the odds of winning a Premium Bonds prize have lengthened to 22,000 to 1 from 21,000 to 1. 

Savers will now be wondering whether it is worth holding on to their Premium Bonds or whether it is time to trade them in for a different account.

For rate-focused savers who want the highest return on their nest egg, one savings expert says ‘it’s time for savers ditch Premium Bonds’.

James Blower, director of website Savings Guru said: ‘It’s time for savers to ditch Premium Bonds – NS&I’s cut looks ill timed, just as the Bank of England and markets are pricing in a more gentle fall in rates, they announce a second successive cut.

‘With the base rate likely to remain at 4.75 per cent next month, this looks an unnecessary move and savers with average luck will earn less than the 4 per cent headline rate.

‘Given that easy access rates are as high as 4.85 per cent and notice accounts are still paying in excess of 5 per cent, there are significantly better returns elsewhere for savers.’

Savers who wish to secure a guaranteed return will find that the top one-year fixed bond pays 4.8 per cent which outpaces inflation by a wie margin. 

Savers who need to dip into their cash will find the top easy access account also pays above what you would get from a premium bond with the top rate sitting at 4.85 per cent 

Savers interested in taking a tax-free route will find the top easy access Isa pays 5.18 per cent on as little as £100 or alternatively the top one-year fixed cash Isa pays 4.52 per cent. 

Caitlyn Eastell, of rates scrutineer Moneyfacts Compare said: ‘A more traditional savings account may be a more viable option for savers looking for higher or guaranteed returns.’ 

So why would anyone keep Premium Bonds? 

Premium Bonds have some unique features that are absent from normal savings accounts which keeps savers coming back for more. 

Many savers enjoy the thrill of the lottery style monthly draws which bring the possibility of becoming a millionaire. But on the other side of that, savers must be prepared to win absolutely nothing in a given month. 

Anna Bowes, co-founder of website Savings Champion said: ‘Although disappointing, it’s not likely to cause too much of an exodus as there are still many reasons for savers to keep their Premium Bonds.

‘Firstly, it’s simply the ‘what if’ factor! There is that frisson of excitement each month; what if I were to win one of the big prizes.’

Any money won as prizes in the the Premium Bonds draw is also completely tax free. 

With a savings account, savers have to pay tax on savings interest above their Personal Savings Alllowance of £1,000 for basic rate tax payers or £500 for higher rate tax payers. Additional rate tax payers have no Psa and pay tax on all their savings interest.

Bowes adds: ‘For taxpayers although on the face of it, the rate of 4 per cent looks less competitive as you can earn up to 4.85 per cent on an easy-access account, if you pay tax on your savings interest, you’d be hard pressed to find an equivalent savings account paying as much.

‘For example, if you were to win the equivalent of the new prize fund interest rate of 4 per cent tax free, as a basic rate taxpayer this rate is the equivalent of earning 5 per cent on a taxable easy access account, 6.67 per cent if you are a higher rate taxpayer and 7.27 per cent for additional rate taxpayers.’

Any money held with NS&I is also backed by the 100 per cent Government guarantee while money kept in regular saving accounts is protected up to £85,000 under the Financial Services Compensations Scheme.