Premium Bond rates have been increased for the third consecutive month and the fifth time in a year as government-backed savings provider NS&I attempts to keep pace with a savings rates war.
The prize rate has increased from 3.15% to 3.3%, taking the amount paid out on average by Premium Bonds ahead of the competition – the highest easy-access account offered by Paragon pays 3.1%, as reported by Moneyfacts.
The news will be welcome to the 22 million savers that have put cash into Premium Bonds, who could win more than they have in years.
With the latest announcement, there will be fewer £25 prizes (where the odds will remain at 24,000 to one, or just over 2 million such prizes in total). Instead, there will be an increased chance to win between £50 and £100, with 1.4 million prizes in this range.
Each month, two people also win the highest prize of £1m, although the most likely outcome is to win nothing at all.
Laura Suter, head of personal finance at AJ Bell, said: “The government-backed provider is trying desperately to keep up with the rates war in the savings market, and as soon as it updates the rate its competitors race ahead of it. As interest rates rise more people engage with their cash savings and shift it to a higher rate account, meaning Premium Bonds need to up their game to attract and retain customers.”
However, even with this increase, most people would be better off with a conventional savings account, she said, noting that not everyone who purchased a Premium Bond will benefit from the advertised rate, which is only an average.
“Most people would be better off with a conventional savings account rather than Premium Bonds. There are a few groups where Premium Bonds are a very attractive option but for most the safety of a regular interest rate will be better,” said Suter.
AJ Bell listed three categories of people for whom Premium Bonds might be interesting.
Firstly, the higher-rate taxpayers who have more than £16,000 in savings accounts. For them, the Personal Savings Allowance only grants £500 of tax-free saving income, so they might want to try their luck with Premium Bonds, which are completely tax-free.
In contrast, a basic-rate taxpayer would need to have around £32,000 in savings to breach their tax-free allowance of £1,000, making Premium Bonds less attractive.
Secondly, the savings account can make sense for those that are happy to take the gamble that they win more than they can get in a traditional account.
“If the savings rates on standard accounts don’t excite you, then you can gamble on winning one of the top Premium Bond prizes – after all, someone has to win it,” said Suter.
However, the chances of winning depend on how much you hold in Premium Bonds. So, someone with £100 saved is much less likely to win than someone who has £20,000.
Thirdly, the very risk averse. An appeal of Premium Bonds is that they are run by the government, so they could be seen as one of the safest places to keep your money. While banks are protected by the Financial Services Compensation Scheme, which covers up to £85,000 of money per person, per financial institution, but theoretically banks could go bust, and the government (and NS&I with it) can’t.
“It’s a marginal difference but some people will feel much safer with their savings being with the Government,” said Suter.