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- NS&I has increased only a third of its target and may need to raise rates to compensate.
According to experts, the National Savings and Investment Fund (NS&I) could increase premium bond premium rates as it has only raised £3.3 billion in the current financial year.
The March 2024 Spring Budget set NS&I’s net funding target for 2024-25 at £9bn, with headroom of plus or minus £4bn.
This means NS&I has a long way to go before reaching its fundraising target, which ranges between £5bn and £13bn.
When NS&I falls behind on its fundraising targets, it can respond by raising savings rates, like when it launched its best-selling 6.2 percent guaranteed growth and income bonds in March 2024.
NS&I may also respond by changing the prize fund rate on premium bonds, as it did when it reduced the prize fund rate this month to 4.15 percent so as not to overshoot its fundraising target.
Balancing act: NS&I’s core function is to raise money for the Treasury, and each year it sets targets for how much money it should generate by selling its savings offerings.
NS&I raised £11.3bn of net funding for the Government in the 2023/24 financial year, the Treasury-backed bank revealed in its latest annual report and accounts.
It means it has surpassed its funding target of £7.5bn, with a headroom of plus or minus £3bn for a range of £4.5bn to £10.5bn.
Its 6.2 per cent Guaranteed Growth and Guaranteed Income Bonds played a big role in this, as they proved to be a big hit with savers.
NS&I chief executive Dax Harkins said: ‘In the summer (last) we were well behind our net funding target, despite successive rate increases on our fixed and variable products.
“In response, we launched new one-year issuances of our popular Guaranteed Growth Bonds and Guaranteed Income Bonds.”
Experts say premium bond rates could rise, despite the recent NS&I cut.
James Blower, founder of wesbite Savings Guru, said: ‘NS&I are actually a bit off track with their funding. But if they repeat last quarter’s performance over the next two, they will be around £8.5bn, well on their way to their £9bn target.’
Premium bonuses have already had their prize pool cut announced, with a 0.25 percent reduction for the December draw. It will stand at 4.15 percent, down from the current level of 4.4 percent, and the odds of winning a prize will increase from 21,000 to one to 22,000 to one.
NS&I said the change to the prize fund was in response to a “changing savings market” as well as the need not to overshoot its net funding target, as set by the Treasury.
At the same time, NS&I announced that it would reduce the rate on its Direct Saver Bonds from 4 percent to 3.75 percent effective November 20.
Income bonds will also fall from 4 percent to 3.75 percent. It is the first time NS&I has reduced interest rates on direct savings and income bonds since November 2020.
Blower said: ‘This appears to be NS&I factoring in the almost certain base rate cut coming next Thursday, where it will be a big surprise if the base rate does not fall from 0.25 per cent to 4.75 per cent. .
‘With premium bonds making up almost 60 per cent of NS&I’s book today, they are the key product to shift if NS&I really wants to impact flows. I suspect they will move the premium bond rate largely in line with the current base rate.
‘What is really interesting about the results is that in both quarters there were outflows of balances from NS&I. The “growth” is made up of the interest earned on the accounts.
‘Given that rates are almost certain to fall in 2025, this figure will reduce as there will be less interest accrued. While it is unlikely to have an impact in this financial year, it could have an impact in future years, as NS&I may have to increase rates or reduce them less than the base rate, to increase accrued interest and alleviate balance outflows that is watching. ‘
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