NS&I (National Savings and Investments) has improved Premium Bonds odds to 21,000 to one from 22,000 to one from September, with the prize fund rate rising to 4.35% from 3.80% for the September draw. Compared with the August draw, an estimated 308,000 more prizes will be available in September, with the prize pot increasing by around £63 million to more than £497 million.
ISA rule change prompts savings rush
Sarah Coles, head of personal finance at AJ Bell, said NS&I had to act after fundraising fell short. She said: "This fundraising shortfall is why we saw the raft of rate rises last week – plus a Premium Bond prize hike in both July and September. NS&I is playing catch-up and needed to do something to move the dial."
Coles pointed to the impact of the Cash ISA allowance reduction. The annual contribution limit for Cash ISAs will drop from £20,000 to £12,000 for anyone aged 64 or under from next April. She said: "The announcement that the Cash ISA allowance would drop from £20,000 to £12,000 for those under the age of 65 from next April has prompted a dash for Cash ISAs, which means it soaked up much of the available savings in this period – including a £12 billion bump in April."
Competitive market pressures NS&I
Coles noted that the savings market has been highly competitive in recent months, with online banks competing to offer the best rates. She said: "For much of this period its offerings have fallen well short of the most generous deals, and it has paid the price. We'll have to wait and see whether this is enough to turn the tide, or whether there could be more rises on the cards."
In September, there are expected to be 12 additional £100,000 prizes, 27 more £50,000 prizes and an extra 51 £25,000 prizes. The estimated number of £1 million prizes for the 22 million-plus Premium Bond holders will remain at two. However, the estimated number of £25 prizes will drop from 2,289,959 to 1,717,659.
NS&I raises other savings rates
Andrew Westhead, NS&I retail director, said: "Not only is NS&I boosting Premium Bonds from September, but from today we are also increasing interest rates for our British savings bonds, plus our direct saver and income bonds. This is to ensure we reflect current market conditions and help to meet our net financing target."
He added: "The September Premium Bonds draw is now expected to have more than 6.5 million tax-free prizes worth over £497 million. Premium Bonds continue to offer over 22 million savers of all ages the monthly excitement of tax-free prizes with 100% security backed by HM Treasury, and the flexibility to withdraw at any time."
NS&I's variable rate direct saver and income bonds accounts have increased from 3.45% AER to 3.75% AER. Both new and existing customers with maturing British savings bonds will also see improved rates.
Experts weigh in on the changes
Coles described NS&I's new one-year bond rate as "unusually competitive" and close to the most competitive options, adding: "Given that this is the most popular term to fix your savings over, it's clearly hoping to persuade rate-chasers to make a small compromise in order to secure a rate that's 100% backed by the Treasury."
She noted that banks have been "competing hard" for savers' cash, saying: "NS&I is pushing for a net financing target of £15 billion this financial year. So far inflows haven't been much to write home about." She said the provider therefore "had to do something fairly dramatic at this stage".
Caitlyn Eastell, a personal finance analyst at Moneyfactscompare.co.uk, said of Premium Bonds: "Despite the improved odds, they are a game of chance and the 4.35% shouldn't be mistaken for a headline rate. With the cost of living continuing to weigh on household budgets, it's understandable savers may not want to leave their returns to chance. The best easy access Isas pay over 4.50% and returns could be even higher if they're willing to lock away their cash."
