You dread a premium bond prize rate cut for ages, and then two come along at once.
Between November and January, the rate will have dropped from 4.4% to 4%. And most savers will get far less than this.
It’s unlikely to put enthusiastic savers off the product, but it should make them think twice about the interest they’re missing out on elsewhere.
This article isn’t personal advice. If you’re not sure an action is right for you, ask for advice. Remember, ISA and tax rules can change, and benefits depend on individual circumstances.
Why has NS&I cut the premium bond prize rate?
A cut was always on the cards, as savings rates across the easy-access market have been falling.
NS&I owes it to the taxpayer not to overpay for savings – so we were expecting a cut.
Two cuts in two months will be a blow for savers though.
Premium bond fans are unlikely to vote with their feet in huge numbers. The product is a national treasure, and an awful lot of people are wedded to them for decades. They’ve faced some pretty dire prize rates in the past when rates were lower, so they’ve lived through worse than this.
Our research shows that 61% of people are well aware that on average they’d be better off in a savings account, but savers are hanging on for the outside chance of a big win.
If you hold the bonds, you need to be absolutely certain you understand how they work.
How do premium bond prizes work?
Despite a prize rate of 4%, in an average month, the average bond holder with £1,000 in bonds will earn nothing.
In the interim, the slight resurgence of inflation means your money will be losing more spending power.
If you’re happy with this trade off, you might choose to stay put. However, if you want to switch, there are still plenty of decent rates on offer in the easy access savings market.
Cash ISAs – better rates on offer?
Like premium bonds, a Cash ISA is tax free, while also paying regular interest. It’s a savings account which lets you save up to £20,000 each tax year as part of your overall ISA allowance, without having to pay tax on interest.
Right now, competitive easy-access Cash ISA rates through HL can get you as high as 4.50% AER*. Bear in mind, easy-access rates are usually variable.
For comparison, NS&I’s variable-rate Cash ISA only pays 3% tax-free- AER**.
*AER (Annual Equivalent Rate) shows what the interest rate would be if it was paid and compounded once each year. It helps you compare the rates on different savings products.
**Tax-free interest/profit in the Cash ISA is paid free of UK income tax.
Currently, inflation is at 2.3% – so it’s offering a tax-free return ahead of inflation, without any risk that a lack of luck will leave you out of pocket.
If you’re looking for the competitive Cash ISA rates, it’s always worth seeing what’s available from online banks and building societies. That’s where you’ll often find the best deals.
A Cash ISA savings platform, like HL's Cash ISA, brings together Cash ISA rates from smaller banks and building societies all through one online account.
With a HL Cash ISA, you can find plenty of rates online which makes shopping around easier.
The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.
Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 2122142).