For this week’s guide, Anna Bowes, savings expert from The Private Office, looks at all the changes being made by National Savings & Investments (NS&I) and whether premium bonds are still worth it…
Firstly, let’s take a look at the changes the NS&I is making.
It will be cutting the rates on Direct Saver, Income Bonds and the prize fund rate on the hugely popular Premium Bonds, in changes that Bowes says are “disappointing” but not “wholly unexpected”.
From 5 March, the rate on Direct Saver will be cut from 3.5% to 3.3% and the rate on Income Bonds will go from 3.44% monthly/3.49% AER to 3.26% monthly/3.3% AER.
The premium bond prize fund rate will be cut to 3.8% from the April 2025 prize draw.
Why is NS&I cutting rates now?
Bowes says the decision follows a 0.25% base rate cut earlier this month, but another factor could be NS&I’s net financing target – the amount of money it needs to raise each year.
For 2024/25, the target is £9bn, with a £4bn leeway each way. By the end of Q2, NS&I had raised £3.3bn, which, while within the margins, is slightly below target.
Are Premium Bonds worth keeping?
According to Bowes, premium bonds remain attractive, particularly for taxpayers, as winnings are tax-free.
“The odds of winning remain at 22,000 to 1, though NS&I is adjusting prize distribution by increasing the number of £25 prizes while cutting some larger ones. However, there will still be two £1m prizes each month” she says.
“Despite the rate cut, premium bonds retain their appeal. The ‘what if’ factor keeps many savers holding on.
“Additionally, for taxpayers, premium bonds may still offer competitive returns when considering tax implications.”
She gave this as an example:
If you were to win the equivalent of the new prize fund interest rate of 3.8%, the tax-free return is equivalent to a 4.75% rate for basic-rate taxpayers, 6.33% for higher-rate taxpayers, and 6.91% for additional-rate taxpayers, in a taxable savings account.
How do the new easy access and ISA rates compare?
Quite simply, there are plenty of other easy access accounts that are paying more, as the table below shows…
You could earn up to 4.57% AER in an unlimited easy access account with Charter Savings Bank, which can be opened online.
If you don’t need unlimited access, Monument Bank is paying 4.75% AER on £25,000 plus – but you can only make three penalty free withdrawals a year.
Kent Reliance’s Easy access savings account issue 76 can be opened in branch or online, and is paying 4.47% monthly/4.56% AER.
“As this illustrates, for many people, switching would be a wise thing to consider if you want to have more pounds in your pocket,” Bowes says.
There are lots of variable rate ISAs paying more too…
Why do some still opt for NS&I?
Although NS&I rates may not be the highest, the institution offers unmatched security, she explains.
“NS&I is fully backed by HM Treasury, ensuring 100% protection on all deposits. In contrast, most banks and building societies are covered by the Financial Services Compensation Scheme up to £85,000 per person per institution. But for those with less than £85,000 or prepared to open multiple accounts, NS&I may not be the first choice.”
The rise of the cash savings platforms has also added another option for those with larger amounts of cash.
“Think of a cash savings platform like a savings supermarket, where with a single application and login, you can pick and choose multiple competitive savings accounts – from easy access to fixed term bonds – and providers at the click of a button,” Bowes says.
“Whilst not whole of market, cash platforms do make it easier to spread your cash, so that it can be better protected by the Financial Services Compensation Scheme.
“While NS&I’s rate cuts are disappointing, the appeal of premium bonds and the security of savings remain strong. However, savers looking for better returns should explore alternatives, as the current market offers more competitive rates.”
