National Savings & Investments (NS&I) is to cut the premium bond prize fund rate from 1.5% to 1.3% from 1 August 2013, meaning it will be harder to win a monthly prize.
The total number of prizes is being slashed from 1,903,314 in July, to 1,751,061 in August 2013, taking the odds of any £1 Bond number winning a prize from 24,000 to 1 to 26,000 to 1.
There will still be one £1 million prize each month, but in August there will only be three £100,000 prizes compared to five in July, and there will be six £50,000 prizes instead of nine. The £25,000 prizes are also being cut, from 20 to 11, while there will be only thirty £10,000 prizes to be won compared to 49.
NS&I said it was seeing increasing numbers of people investing in premium bonds because savings rates have fallen. This has made the bonds more attractive and NS&I could face accusations that it is taking unfair advantage of its government backing to attract deposits.
Jane Platt, Chief Executive of NS&I, said: "Rates across the savings market have fallen over recent months, resulting in NS&I savings being increasingly attractive. To ensure we stay within our Net Financing target – and in light of our framework to balance the needs of our savers, taxpayers and the stability of the broader financial services sector - we now need to reduce the Premium Bond prize fund rate."
NS&I premium bonds - what are your investment alternatives?
Customers have over 22 million holdings in Premium Bonds, worth some £45 billion. Prizes are free of income tax and capital gains tax, making them even more popular with savers.
Last month, NS&I announced it was reducing the interest rates on its Income Bonds, Direct Saver and Direct ISA with effect from 12 September 2013.
Patrick Connolly, certified financial planner at Chase de Vere, says: "The returns on premium bonds are tax-free and so equate to a return of 1.625% per annum for a basic-rate taxpayer, 2.17% for a higher-rate taxpayer and 2.36% for a 45% taxpayer. These rates, particularly for higher and additional-rate taxpayers, remain very competitive in the savings market.
"With savings rates so low, many savers will still be willing to take the chance of receiving a lower or no return with premium bonds because they don't feel they are missing out on much interest in other savings accounts and, of course, there is always the chance they are lucky enough to win a significantly bigger return.
"The worst scenario for investors is that they don't win any prizes and then get their money back."