While interest rate rises throughout 2022 and 2023 have proven problematic for borrowers, they have come as good news for many savers. Many people with savings had to cope with minimal interest while the Bank of England base rate remained at historic lows, but this has now changed due to the spate of rate hikes since December 2021. Many are now enjoying much higher rates of interest on their savings.
For borrowers with variable-rate loans, mortgages, credit cards, and other forms of finance, the rate increases have come as a shock. However, for savers, the rises have allowed them to see their bank account and building society account balances swell with increased interest.
Of course, savers must consider the savings account they choose if they want to make the most of their money. There are many different accounts that savers can choose from these days, from ISA tax-free savings accounts to easy access accounts, junior ISAs, and other savings products, and the rate of interest paid can vary.
It can be challenging for savers to choose the best building society, bank account, or investment account because of the many available options.
Launched in the 1950s to encourage saving, premium bonds have become popular with people of all ages who want to save money while being in with the chance to win big money. Accounts can be set up easily and quickly on the NS&I website (National Savings and Investments), and many lucky premium bond holders have won massive amounts of money in the monthly prize draw.
So, what about interest rates?
When people open a bank account, whether a cash ISA, direct ISA, income bonds, or any other savings product, they want to know the savings rate/AER. They also want to know about things such as whether it is an easy-access savings account or whether their money will be tied up for a specified period.
With the premium bonds model, no interest is paid on your money. So, if you put your money into premium bonds with NS&I, you won’t earn interest, but the entire sum held – which becomes the prize fund – does earn interest. This means that if interest rates increase, the prizes will be worth more.
However, there are changes with the premium bonds prize fund rate, which means that the prize fund will be higher with the number of prizes up for grabs increasing.
NS&I offers several savings products, including Green Savings Bonds and Growth Bonds. In addition to increasing the prize fund rate, NS&I has increased the rate on its Direct Saver and Income Bonds.
In June 2023, NS&I announced that the interest rate on the prize fund would increase from 3.30% to 3.70%. This was to be effective from the July prize draw. Just a month later, in July 2023, it was announced that the interest rate would rise again, from 3.70% to 4.00%.
Premium bond interest rates have increased to the highest level since 2007, generating excitement among investors. The most recent increase that the chances of winning a prize has improved to 1 in 22,000.
According to officials from NS&I, the interest rate increase means that an additional £30 million is added to the prize fund, and the number of prizes has increased by 460,000. This is likely to make the government-backed savings scheme even more popular, with the Chief Executive of NS&I, Dax Harkins, stating that they were delighted to be able to improve odds for premium bond holders.
In September 2023, an NS&I spokesperson told InterestRate.co.uk: “Premium Bonds are one of the nation’s favourite savings products, and our ongoing work with our increased prize fund rate means that more people will have the chance to win prizes each month and more lives will be changed by Premium Bonds. We’re delighted that we’re able to improve the odds for Bond holders up and down the county. Our changes ensure that NS&I’s products remain attractive to customers and that it continues to balance the interests of savers, taxpayers and the broader financial services sector.“
And these latest increases may not be the last, according to some analysts. Sarah Coles, Head of Personal Finance and Podcast Host for Switch Your Money On, told us: “Given NS&I’s punchy fundraising target, we can’t rule out more prize rate hikes in the coming months. It’s great news for loyal bondholders, who are prepared to accept the drawbacks of the bonds in return for the chance to win big. It’s also good news for the wider market, because smaller and newer banks are working even harder to attract your cash.”
What are the pros and cons of premium bonds?
If you are considering getting premium bonds, the interest rate increase on the prize fund and the number of prizes now up for grabs seem appealing. However, weighing up all the pros and cons before you decide whether this is the right savings route for you is crucial.
The pros
Tax-free winnings
One thing that attracts many people to premium bonds is that winnings are tax-free, so winning big could mean significant savings for taxpayers.
Chance to win big
The prizes you can win with premium bonds range from £25 to £1 million. There are only two £1 million monthly payouts, but winning the jackpot or another big prize is possible. Essentially, every bond you hold is like a lottery ticket, so you have the chance of winning something in every monthly draw that takes place.
Easy access to money
Another thing to remember is that you have easy access to your money with premium bonds. You can request to withdraw some or all of your bonds at any time, which will be paid into your bank account within a matter of days. In addition, you can request that any prize money you win is either reinvested automatically or paid into your bank account.
Simple to set up and monitor
Setting up and monitoring your premium bonds account is very simple, and you can do it all online these days. You no longer have to apply by post, although this is an option, and you no longer need paper certificates. Instead, everything is stored and dealt with online, and even your prize notifications can be sent via email.
The cons
No interest paid on savings
While there is interest on the prize fund, you won’t pay any interest on your savings when you have premium bonds. So, if you do not win any prizes, the amount in your premium bonds account will remain the same, no matter what happens with the base interest rate.
Maximum of £50,000
For some people, the fact that there is a limit on the amount that you can hold in premium bonds could be off-putting. Some people want to put all their savings into one place, but the maximum you can have in premium bonds is £50,000.
Odds of winning
While being in with the chance of winning a big prize can be exciting, the odds of winning are still low. The odds have improved from 24,000 to 1 to 22,000 to 1, which is good news. However, many people with premium bonds never win a prize, so you need to keep this in mind.
Myron Jobson, Senior Personal Finance Analyst, interactive investor, told InterestRate.co.uk: “Premium Bonds can be fun lottery-style alternatives to an easy access savings account and might tempt some savers hoping for good luck to bolster their wealth. But the fact remains that while some savers might be lucky enough to hit the jackpot or win big early on, others may save and wait for long periods for even a small return.”
Cannot be inherited
Remember that you cannot inherit premium bonds, and it is not possible to assign a beneficiary. In the event of the account holder’s death, the estate executor can keep the premium bonds active for a year or cash them in as part of the estate. If they choose to keep them invested, they will have to be cashed in after one year.
Making the right decision
Now that we’ve looked at how interest rates work on premium bonds and delved into the pros and cons, you can make a more informed decision regarding whether premium bonds are the right choice.
Many people invest some of their savings in premium bonds in the hopes of winning and the remainder in a high-interest savings account. It’s like having a balanced diet for your money. By spreading your savings across these two avenues, you’re reducing the risk of having all your hopes pinned on a single outcome. It’s a strategy that gives you the best of both worlds – the thrill of chance and the steady growth of reliability.