Home Money New NS&I financing targets in Budget could mean further cuts to Premium Bonds underlying rate

New NS&I financing targets in Budget could mean further cuts to Premium Bonds underlying rate

by Elijah
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New NS&I financing targets in Budget could mean further cuts to Premium Bonds underlying rate

The underlying premium bond rate could be set for another cut, depending on the net funding targets outlined for National Savings and Investment in tomorrow’s Budget.

NS&I’s fundraising targets were frozen in last November’s Autumn Statement, when the Treasury-backed bank announced it had hit its fundraising target for the year in excess of £2.3bn, raising £9.8 billion from savers in the six months to November 2023.

This ultimately led to the Premium Bonds prize pool being reduced in January from 4.65 percent to 4.4 percent, which took effect at the March 1, 2024 prize draw.

But depending on NS&I’s goals – the amount of cash it aims to get versus withdrawals – this may not be the last time savers see the reward rate fall in the coming months, experts say.

New NSI financing targets in Budget could mean further cuts

Chancellor Jeremy Hunt could announce changes to NS&I’s fundraising targets, which could lead to a change to the premium bond prize pool.

What are the results of the prize fund?

If the Chancellor deviates from this year’s target of £7.5bn (give or take £3bn), savers can expect savings rates to move.

NS&I has to perform a balancing act. You need to raise enough money for the Treasury in the most cost-effective way possible.

It is expected to offer a decent deal for savers and tries not to disrupt the rest of the savings market by offering something significantly better than the current rate.

This is what happened with NS&I’s 6.2 percent one-year fixed rate bonds, which were launched in August 2023 and withdrawn from the market in October 2023.

Savings experts agree that NS&I’s 6.2 percent deal unbalanced the one-year fixed-rate bond market.

Much of the £9.8bn NS&I raised in 2023 came from savers investing in its excellent 6.2 per cent one-year fixed rate deal.

If the Chancellor announces a higher target for NS&I this year and needs to raise more cash, there will be greater scope for higher rates on savings products, a higher premium bond prize fund or putting bonds back on sale at a anus.

If the target is cut and less needs to be raised, rates will fall, because profitability becomes a greater priority.

James Blower, founder of the Savings Guru website, says: The amount saved on premium bonds rose by £500m in February and has risen by more than £3bn in the past year. If this were to continue, there is little justification for a further rate cut unless the funding target for NS&I is substantially reduced in the Budget on Wednesday.’

This could mean bad news for premium bond savers, who could see the underlying rate reduced.

“If the target is similar to this year, savers can expect the premium bond premium rate to remain stable in the short term,” says Sarah Coles of investment platform Hargreaves Lansdown.

Blower says: “If the funding target is between £5bn and £8bn then I can’t foresee any changes to the premium bonds in the coming months.”

This would mean that NS&I would not need to increase fees or add more prizes to raise money and meet its fundraising target.

‘However, given expectations that the Bank of England will begin to cut rates in the coming months, this will not last forever. The next step for these bonuses is probably a cut,’ adds Coles.

Coles says: ‘More than 24 million savers will be hanging on Jeremy Hunt’s every word for good news on premium bonds in this week’s Budget.

“They suffered a cut in their prize fund this month and need to know if this is the last bad news or just the beginning.”

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Are premium bonuses worth it if the prize fund is cut?

Premium bonds are the UK’s most popular savings product.

Many savers like the excitement of knowing if they have won a prize in each month’s draw.

Unlike other savings products, Premium Bonds do not have a guaranteed interest rate.

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Instead, you have the chance to win tax-free cash prizes of between £25 and £1 million every month in the prize draw.

The annual rate of Premium Bonds is now 4.4 percent.

It indicates the average return you will get for your money, but in reality you may not win any prizes in a given month.

Coles says: ‘When you weigh up your options, the risk of cuts must be added to the fact that prizes are not guaranteed.

‘In the March draw, with £25 in bonuses, your chances of winning the jackpot were just under one in more than 2.5 million.

“In a normal year, the average person holding £1,000 in bonds will earn nothing.”

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Some links in this article may be affiliate links. If you click on them, we may earn a small commission. That helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.

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