Big change to Premium Bonds coming in weeks – see how your chances of winning are affected

A BIG change is coming to Premium Bonds next month and it could affect your chances of winning. 

NS&I has announced that it will slash Premium Bonds prizes from the December draw onwards.

The Treasury-backed savings provider has revealed that prize fund rates will be reduced to 4.15% from 4.40% currently - weakening the chances of you winning big.

Back in March, the NS&I prize fund rate was cut from 4.65% to 4.40%.

Chances of winning will fall from 22,000 to 1 from where it was 21,000 to 1 previously.

There will still be an estimated two prizes of £1million in the December draw, the same as in October.

But in total there will be an estimated 5,726,438 prizes worth £435,686,300 in December, down from 5,991,306 prizes worth £461,330,525 this month.

It comes after the Bank of England cut base rates for the first time in a year in August, and further reductions are expected over the coming months.

NS&I, which is backed by the Treasury, has a duty to balance the needs of savers, taxpayers and the wider financial market.

Andrew Westhead, NS&I retail director, said: “As the savings market continues to change, we need to lower the rates on some of our products to help us meet our net financing target, while also ensuring we continue to balance the interests of our savers, taxpayers and the broader financial services sector.

“Even with the changes, we’re still expecting to pay out over 5.7million prizes worth over £435million in the December Premium Bonds draw."

Not only that but for the first time since November 2020, NS&I will cut interest rates for Direct Saver and Income Bonds.

From November 20, the variable interest rate for Direct Saver and Income Bonds will change to 3.75% AER (annual equivalent rate), from 4% at the moment.

A new two-year issue of British Savings Bonds has also gone on sale offering 4.10% AER for the Guaranteed Growth Bond option and 4.09% AER for the Guaranteed Income option, both down from previously offered rates of 4.25%.

What do the experts say?

And finance experts at AJ Bell revealed that most Premium Bond holders will never win a prize.

Recent figures from an FOI obtained by AJ Bell showing two-thirds of those holding the bonds have never won.

Laura Suter, director of personal finance at AJ Bell, said: "Premium Bonds will see their ‘effective prize rate’ drop to 4.15% and their odds reduced to 22,000 to 1 from the December draw, something which may prompt some of the around 22.5million bond holders to reconsider their position.

"The prize rate only accounts for the average rate paid out on prizes, but in reality there is no guarantee of receiving any return as many bond holders will never win a prize, particularly those with smaller amounts of cash saved in the bonds."

When you factor in that many people will have been holding Premium Bonds for decades, perhaps receiving them as gifts when they were young, that means they may have missed out on significant returns in a higher paying cash account or by investing."

She also said the change is a sign that the savings market is preparing for more interest rate cuts from the Bank of England.

She said: “Despite the interest rate cuts, these accounts are still likely to continue to be very popular as they are backed by NS&I and many savers have huge brand loyalty to the organisation.

"But with another interest rate cut now expected at the next Bank of England monetary policy meeting in November, as well as potentially a further cut in December, savers should remain alert to the changes in the savings market and explore the best rates where they can."

Sarah Coles, head of personal finance, Hargreaves Lansdown, agree that the news reflects the market and that the Premium Bond prize rate has "finally been hit with the business end of the savings rate scythe".

She explained: “This was always going to happen eventually. NS&I has a duty not to overpay for the money it raises for the Treasury, which means the prize rate needs to be middle of the pack within the easy access savings market.

“After the Bank of England rate cut, these have been heading downhill, albeit impressively slowly. Moneyfacts figures show the average easy access account is currently offering 3.04% – compared to 3.13% two months ago, and Premium Bonds have finally succumbed."

Ms Coles did point out that the prize rate doesn’t reflect what you’ll make in these bonds, and because of the "lumpy" way that prizes are awarded, the average person with £1,000 in bonds will still win nothing in the average month.

“The lengthening of the odds of a win should be food for thought for anyone who is holding money in these accounts and losing money after inflation," she added.

Referring to the rate reductions on the new launch of British Savings Bonds, Ms Coles added: “You can do far better elsewhere, with the best on the market offering 4.6%.

“And while the Treasury guarantee of your savings and the attraction of the brand will go a long way, for plenty of people it’s not going to make up enough ground. These bonds look unlikely to shake or stir anyone.”

What are Premium Bonds?

Premium Bonds are a type of savings account that doesn't offer interest payments like conventional accounts.