National Savings & Investments (NS&I) has increased the prize fund rate for its Premium Bonds for the fifth time in the space of 12 months, as it seeks to attract more savers.
The prize fund rate, equivalent to the proportion of total Premium Bonds investments that is paid out in prizes and represents the bonds’ ‘effective interest rate’, will go up from 3.15 per cent to 3.30 per cent from March.
NS&I will increase the number of Premium Bond prizes worth between £50 and £100,000, while reducing the number of prizes worth £25. The total number of prizes will stay the same, meaning that the odds of winning remain flat at 24,000 to 1, but those who do win are more likely to get a higher prize.
The change now means Premium Bonds are highest-paying savings deal, with the best easy-access account paying 3.05 per cent. Laura Suter, head of personal finance at AJ Bell, said this was an unusual situation that could prove short-lived.
“Typically NS&I will never aim to lead the market and beat competition, but in the face of regular savings accounts offering much higher rates and savers being far more likely to shift their money to other providers, the government-backed provider clearly needs to get more savers through the door,” she added.
The increases were likely to wane once interest rates stopped rising, with the savings market “likely to reach its peak soon”, Suter added.
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Premium Bond’s effective rate increased from 3 per cent to 3.15 per cent only this month and the latest change comes after other increases to NS&I’s Income Bonds and Green Bonds.
Despite the rate hikes, most savers will still be better off elsewhere. Unlike with a standard savings account, the effective rate paid by Premium Bonds is not guaranteed. Some will earn nothing on their investment although a bigger deposit corresponds to a better chance of winning a prize.
The prizes are tax-free, making the bonds a more attractive option for additional rate taxpayers or for savers who exhaust both their personal savings allowance and their Isa allowance.
NS&I also increased the interest rate on its two standard easy-access accounts, Direct Saver and Income Bonds, to 2.85 per cent with immediate effect.