NS&I cuts interest rates and premium bond prizes: switch for better rates
NS&I (National Savings & Investments) will cut the number of Premium Bond prizes it offers, while it will also slash the interest it pays on a range of savings accounts this summer, the Treasury-backed savings organisation has announced.
From 1 June, the Premium Bond prize pool will fall by about £4.7 million each month, and the odds of a single bond winning a prize will stretch to one in 30,000 from one in 26,000.
Interest rates will also be cut on five accounts: the Direct Isa, Direct Saver, Income Bonds, the Investment Account and Index Linked Savings Certificates, with most the changes taking place in June.
The announcement reflects the wider savings market where rates have plummeted in the last month, particularly on Isa accounts. See our Top cash Isas and best savings accounts best buys.
Jane Platt, NS&I’s chief executive says: “The majority of the new interest rates on offer are either at, or above, average market rates.
“We believe they present a fair offer to customers, who will also continue to benefit from our 100% HM Treasury guarantee on all holdings, as well as tax-free prizes for Premium Bonds.”
300,000 fewer Premium Bond Prizes each month
Under the reshuffle, the chances of winning the chances of winning the £1 million jackpot won’t change. However, the chances of a big win will fall dramatically as the number of prizes worth £10,000 or more will fall by more than half.
There will also be 400,000 fewer £25 prizes each month – the minimum amount up for grabs.
However, the chances of winning other prizes will increase. There will be 90,000 more prizes worth £50 or £100 each month, almost a 250% increase.
This means the effective pay out rate for Premium Bonds will fall from 1.35% to 1.25%, meaning NS&I will pay £125 per year for every £10,000 held in Premium Bonds.
But in reality the actual amount you win from premium bonds will probably be less (though it could be more), as the average pay out rate is pushed up by a very small number of bumper bonuses.
What’s happening with NS&I savings?
Below is what’s happening to NS&I’s savings accounts – all of the changes will affect new and existing customers.
From 6 June:
- The Direct Isa will pay 1% interest, a fifth less than the current 1.25% rate.
- Income Bonds, which have the option for interest to be paid monthly instead of annually, will pay 1%, down from 1.25%.
- The Direct Saver will pay 0.8%, 0.3 percentage points less than the current 1.1% rate.
- From 1 July:
- The Investment Account (a postal-only easy-access account) will pay just 0.45%, down from 0.75%
Index-Linked Savings Certificates, which are a type of fixed-rate savings accounts guaranteed to beat inflation [that’s no longer on sale], will pay 0.01% more than the retail price index (RPI) for people with bonds maturing on 28 March 2016 or later.
This is down from 0.05% more than inflation. Interest paid from these is tax free meaning it won’t eat into your new personal savings allowance.
If you hold an Index-Linked Savings Certificate, you won’t be affected by the rate cut until your account matures, at which point you can chose to accept the new lower interest rate, or move your money elsewhere (see below for how to get the best rates).
Beat the rate cuts
NS&I will write to everyone who holds an affected variable rate savings account over the coming weeks to notify them of the changes.
However, if you hold one of these accounts it will pay to switch to a higher rate. You can get up to 1.65% on an Easy access, while you can earn up to 5% interest on your savings.
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
A form of National Savings Certificate, premium bonds are effectively gilt-edged securities: you loan your money to the government and, in return, it pays you for the privilege with a guarantee it will return your capital at a specified date. Where premium bonds differ is that the interest payments (currently 1.5%) are pooled and paid out as prize money and you can get your cash back within a fortnight, with no risk. Launched by Chancellor of the Exchequer Harold Macmillan in his 1956 Budget, every single £1 unit has the same chance of winning and in May 2011, 1,772,482 winners (from a total draw of 42,539,589,993 eligible bond numbers) shared £53,174,500. The odds of winning are 24,000 to 1 and the maximum holding is £30,000 per person but it remains the only punt in which you can perpetually recycle your stake money.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.