Premium bond holders are likely to hear bad news soon. Another cut to the prize rate seems inevitable – and I think it could come as early as the July draw.
That is because savings providers are cutting interest rates on their variable rate accounts in their droves, which makes National
Savings & Investments (NS&I) offerings look particularly favourable by comparison.
The NS&I prize rate has been reduced several times – from 4.4 per cent to 4.15 per cent in December last year, 4 per cent in January and 3.8 per cent last month.
But even so, the prize rate is now above the interest rate offered by the big High Street banks and five largest building societies on their easy-access accounts.
The one exception is Yorkshire BS Online Easy Access Saver 4, which will pay 4 per cent after its rate cut on June 19. When savings rates tumble elsewhere, NS&I must follow suit.
Pot luck: The NS&I prize rate has been reduced several times recently – from 4.4% to 4.15% in December last year, 4% in January and 3.8% last month
It needs to raise more money for the Government – £12 billion for this financial year which started on April 1, up from £10 billion last year, both with a margin of £4 billion each side.
But if its products look too enticing, it risks overshooting its target. Furthermore, if it gives savers a better rate than they can get elsewhere, it upsets the mortgage market as money rushes into NS&I rather than into banks and building societies to lend to home buyers.
The prize fund will be in the firing line because Premium Bonds are NS&I’s best seller making up 55 per cent of the £230 billion or more we hold with the Government-sponsored savings arm.
Even though the prize draw fund has fallen over the past 12 months, we still ploughed another £6.5 billion into Premium Bonds.
They have been a favourite with some savers lured by the chance of winning the £1 million tax-free jackpot each month or even a smaller prize from a meagre £25 to £100,000.
Granted, some easy-access accounts from NS&I’s rivals still pay well over 4 per cent. The best is from online bank Cahoot, part of Santander, which pays 5 per cent.
But it only offers this on the first £3,000 in the account and the rate could drop soon. Atom Reward pays 4.75 per cent but only if your money remains untouched for 12 months.
With Coventry BS, you can see 4.5 per cent in its 4 Access Saver, but you only get this rate if you don’t take money out more than four times a year.
I don’t include these in my best buy tables but instead concentrate on those that give you easy access to your money.
The best rate with no strings attached comes from Family BS with its Online Saver at 4.55 per cent – launched yesterday.
Kent Reliance pays 4.46 per cent for new customers only. If you have an older account, the rate is likely to be less.
Isa loyalty may prove a costly tactic
Don’t fall into the trap of simply renewing your one-year fixed-rate bond or Isa with the same provider.
Rates on these accounts change all the time. This time last year, 18 providers were paying 5 per cent or more.
Some of these now pay mediocre rates at best to those who renew their bonds.
New names such as Chetwood Bank (4.36 per cent), Birmingham Bank (4.36 per cent) and JN Bank (4.35 per cent) pay top rates.
Meanwhile, those such as Stream, Beehive, Allica Bank, MBNA (part of Lloyds) and OakNorth have slid down the ladder, paying between 3.8 per cent (Nottingham) and 4.1 per cent (MBNA).
The worst one-year fixed-rate bond from a large provider is 3.66 per cent from NatWest.
