National Savings & Investments has given its 22 million Premium Bond holders a Christmas gift they don’t want.
Yesterday it announced yet another cut to its prize rate.
It is already set to fall from 4.4 pc to 4.15 pc for next week’s draw (December 2). But from the January draw it will drop to 4 pc – the lowest level since August 2023. That’s a total cut of 0.4 percentage points in just two months.
It is also chopping the rate of its easy-access Direct Saver and Income Bonds just five days before Christmas. These accounts are popular with pensioners because they pay out interest every month.
The rate on the Direct Saver will fall from 3.75 pc to 3.5 pc from December 20. Until last week, it paid 4 pc.
Cuts of the same size await holders of Income Bonds where the rate falls to 3.44 pc from December 20.
Andrew Westhead, retail director at NS&I, tells me that the cuts follow those dished out by other providers.
These are coming thick and fast from banks and building societies in response to two cuts in base rate from the Bank of England from 5.25 pc to 4.75 pc since August.
These accounts are popular with pensioners because they pay out interest every month
NS&I does not want to attract too much money by paying top rates for fear of busting the £9 billion target the Government has asked it to raise in its current financial year that runs to the end of March next year. It has some leeway – it can be £4 billion above or below target – but without rate cuts, it risks breaching even its maximum.
Further base rate cuts this year are looking unlikely, which means NS&I rates should not fall further either.
Last week we heard that the rise in the cost of living jumped to 2.3 pc in the year to October, up from 1.7 pc in September. This is above the Bank of England target inflation rate of 2 pc.
As a result, experts now think a further cut in base rate (originally expected at its December 19 meeting) is unlikely. So the next cut is not on the cards until its Monetary Policy Committee meeting on February 6.
Of course, NS&I could cut rates ahead of another base rate drop, but only if it finds it is being swamped with money. This could happen if other providers continue to slash their rates, leaving NS&I’s looking generous again.
Despite the cuts, Premium Bonds are still a good deal for some savers.
Their big advantage is that prizes are tax-free so they will appeal to savers who have used their annual £20,000 Isa allowance and their personal savings allowance, which gives basic-rate taxpayers their first £1,000 on interest in non-Isa accounts with no tax to pay. Higher-rate payers get a £500 a year allowance, while additional 45 pc payers get nothing.
Of course, they also appeal to those who like the idea of having a chance to win every month. The more you have, the greater your chance of winning.
Down: The Premium Bonds prize fund has once again been cut. It will sit at 4pc from January 2025 after being cut to 4.15pc last month
Around two-thirds of Premium Bond holders – that’s more than 14 million savers – have never won a prize, a Freedom of Information request by financial website AJ Bell reveals; and, unsurprisingly, those with smaller holdings are most likely to miss out.
The average holding for the 5.3 million winners in the 12 months to May this year sat at £23,037, with four out of five winning more than once. The average holding for those winning nothing during that time was £175.
The odds of winning in the December draw are lengthening from 21,000-to-one to 22,000-to-one. The odds for the January 2 draw remain at 22,000-to-one.
There were more than six million prizes handed out this month. The number is set to drop to 5.726 million next month but expected to rise to 5.89 million in January. That’s because NS&I has jiggled around the size of the prizes.
There will still be two £1million jackpots to be won, but the number of other large prizes will fall. The worst hit are the £100 and £50 ones, which will fall by 71,071 between December and January.
At the same time NS&I has upped the number of smaller £25 prizes from 1,498,592 in November to 1,509,458 in December and again to 1,815,854 in January. That’s an extra 306,396 £25 prizes in January compared with December.
The rise comes even though it expects to pay out less in prizes – £431,938,050 in January against £435,686,300 in December (both down from the £463,982,050 this month when the prize fund stood at 4.4 pc).
Sy.morris@dailymail.co.uk
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