There was bad news for Britain’s 21 million-strong army of premium bond holders this week: the (already slim) odds of winning a prize are about to get even worse. National Savings & Investments has slashed the number of premium bond prizes, reducing people’s chances of winning. At the same time it has cut the interest rates on many of its savings accounts.
So is it still worth having a flutter on premium bonds? And if it isn’t, what are the other options for your nest-egg cash, bearing in mind that savings rates are so dismal at the moment?
In recent years savers have ploughed billions of pounds into premium bonds, with many taking the view that as rates are so terrible, they might as well have a bit of fun with their cash and hopefully win some prizes. This week’s announcement was arguably rather unfortunately timed, bearing in mind that premium bonds effectively celebrate their 60th birthday this month. Harold Macmillan announced their launch on 17 April 1956. His intention was to reduce inflation and offer an alternative way to save – and, of course, they proved to be a huge success.
However, news of the cuts may leave some fans wondering whether now is the time to bail out. NS&I announced that the premium bond “prize fund rate” – the proportion of the total amount invested paid out in prizes – is being reduced from 1.35% to 1.25% with effect from 1 June. Because it is tax-free, the new rate is equivalent to a return of 1.56% a year for a basic-rate taxpayer and 2.08% a year for a higher-rate taxpayer.
The reduction reflects the fact that both the total number and value of prizes is being cut. The total value of the prize pot in March was £67m, but in June it is estimated it will be £62m.
As part of the changes there will be fewer higher-value prizes and more smaller ones. For example, it’s predicted there will be just two £100,000 prizes in June, compared with five in March, while the number of £50,000 prizes is set to plummet from 12 to five. By contrast, the total number of £50 and £100 prizes will shoot up from 37,000 last month to an estimated 128,000 in June.
Even with all those extra lower-value prizes in the mix, the odds of winning a prize with each £1 bond number will lengthen to 30,000-1. That compares with the current odds of 26,000-1. The changes partly reflect the fact that NS&I needs to raise less money in the next financial year than it did this year. It is also a response to rivals dropping their rates, making the government-owned institution’s returns look more appealing.
Hannah Maundrell, editor in chief at comparison site money.co.uk, reckons anyone with cash in premium bonds “should really think twice about whether their money is working hard enough”.
With premium bonds you don’t earn any interest, so unless you win big or regularly pick up smaller prizes, the value of your nest-egg will actually devalue over time. “The chances of winning weren’t good anyway, and now they’re being cut further – it’s the perfect time to look at where your money is best placed. If you like the frivolity of being in the prize draw and aren’t relying on your money to grow, then great – enjoy being part of the action. If you want real returns on your hard-earned cash it may be time to say goodbye to premium bonds and move your money elsewhere,” says Maundrell.
She adds that with the launch on Wednesday 6 April of both the “innovative finance” Isa (which will allow savers to slot peer-to-peer loans into these tax-efficient wrappers) and the personal savings allowance (whereby as a basic-rate taxpayer you will be able to earn up to £1,000 in savings income tax-free – higher-rate taxpayers will be able to earn up to £500) people have never had so many options for strategic saving and investing.
Danny Cox, a chartered financial planner at investment firm Hargreaves Lansdown, says premium bonds “are looking increasingly unattractive, but may still be a solution for higher-rate taxpayers looking for a temporary home for some of their cash.”
Of course, the problem for risk-averse people looking for somewhere to stash their cash is that savings rates are pretty ghastly at the moment. NS&I is cutting the rate on its Investment Account, held by more than 1.7 million people, from 0.75% to 0.45%, while the 415,000 holders of the Direct Isa will see their rate drop from 1.25% to 1%. The Direct Saver rate will fall to 0.8% from 1.1%, and Income Bonds will pay 1%, down from 1.25% gross/1.26% AER at the moment. All these changes take effect on 6 June, except for the Investment Account change, which applies from 1 July.
On Wednesday, financial data website Moneyfacts.co.uk declared that savers are facing “the worst Isa season on record”, with the average cash Isa now paying 1.29% – down from 1.45% a year ago and 2.39% five years ago. The average easy-access Isa now pays just 1.04%, compared with 1.12% as recently as six months ago. However, there are accounts out there that pay much less than that, so check what rate you are getting.
There are a few bright spots for savers, however. Rachel Springall from Moneyfacts says grabbing a help-to-buy Isa is a must for any prospective homebuyer, as the interest rates “beat all other Isa deals into the ground”. Also, last month Santander upped its help-to-buy Isa rate to 4%. If you’re a customer with the Spanish-owned bank, it has also launched the Regular eSaver account paying a table-topping 5%. Customers can save up to £200 a month by setting up a standing order from their Santander current account. But be aware that after 12 months it will change to an Everyday Saver account, which pays just 0.25%. Customers can open the account in branch or by phone, and can access it online. There are no penalties for withdrawals and there is no minimum opening or monthly deposit.
