Sylvia Morris: Premium bond reward rates are falling just as I predicted – this is what I’m doing now

It’s disappointing news for the 24 million of us who every month hope to win a Premium Bonus.

As I predicted in Money Mail last week, the government-run National Savings & Investments (NS&I) is cutting the amount it pays out in prizes. The premium bond premium rate will fall to 4.15 percent in December, from 4.4 percent currently. That means £25.6 million less paid, with 264,868 fewer awards. The odds of winning will drop to 22,000 to 1 from the current odds of 21,000 to 1. NS&I says the change was made in response to a changing savings market.

I suspected a cut was on the cards, but it is a surprise move by NS&I just a week before the Budget, when the Chancellor could make announcements that would affect its strategy.

He tells me that money is coming into NS&I at such a rate that it is in danger of surpassing the target amount it needs to raise this year.

At 4.4 percent, the Premium Bonus prize draw rate was still attractive compared to regular easy access accounts where top rates ranged from 4.87 to 5 percent. Especially considering that the prizes are tax-free.

And so it should remain. The Bank of England is likely to cut the base rate from its current 5 percent at its next meeting on Nov. 7, and perhaps again in December.

Banks have already been cutting savings rates and should make further reductions later in the year.

With this in mind, I maintain my Premium Bonds. I think they are great for saving money that will be needed soon, but they can also be put to work until then. After the cut, there will still be two top prizes of £1 million, but five winners under £100,000. The most affected will be prizes valued at £100 and £50, dropping from 139,999 each to 2,072,099 each.

NS&I has also announced sweeping cuts to its Direct Saver account and fixed rate bonds. Starting Nov. 20, your Direct Saver interest rate will drop 0.25 percentage points, from 4 percent to 3.7 percent.

Its income bonds will fall for the first time since September 2020, from 3.93 percent to 3.69 percent.

The new issue of the two-year British Savings Bond went on sale yesterday at a lower rate of 4.10 per cent.

The two-year Guaranteed Growth Bonds and Guaranteed Income Bonds have also seen a reduction of 0.15 points to 4.1 per cent and 4.02 per cent respectively, effective yesterday.