NS&I Premium Bonds warning over major change for all savers

Premium Bonds holders may want to check over their account as a major change will come into effect in less than two weeks.

Provider NS&I is to slash the prize fund rate from the August draw, with the rate to fall from the current 3.8 percent down to 3.6 percent.

The odds of each £1 Bond winning will stay the same, at 22,000 to one. The results of the August draw will be announced on August 2 - the prize draw for each month takes place at the start of the month.

This will be the third time NS&I has reduced the prize fund rate this year. The rate fell from 4.15 percent down to 4 percent from the January draw, and from 4 percent down to 3.8 percent from the April draw. The rate was also cut in December last year.

Andrew Westhead, NS&I retail director, said the move to reduce the rate reflects "the changing landscape for savings".

He said: "Premium Bonds maintain their unique appeal by offering complete security backed by HM Treasury, the flexibility to withdraw easily, and the excitement of potentially winning a tax-free prize each month. The August draw is expected to deliver more than 6 million tax-free prizes worth over £396million."

Many savings providers have been reducing their rates as the base interest rate set by the Bank of England has been dropped in recent months.

The base rate sits at 4.25 percent, having last been cut in May. The next decision on the base rate will come soon after the Premium Bonds prize rate cut comes into effect, with the Bank of England to meet on August 7.

One advantage of Premium Bonds are that all your prizes are tax-free, even for large cash prizes such as £100,000, £50,000 or the £1million jackpot. There are two £1million prizes in each draw.

However, with another drop in the prize fund rate on the horizon, some Bond holders may be looking at cashing in their Bonds and moving into other savings options.

Amy Knight, personal finance expert at NerdWallet UK, said: "Anyone on a mission to maximise the growth of their savings should think about moving funds out of Premium Bonds into a savings account with a guaranteed return.

"If inflation shoots back up, you'll be glad to have shifted your savings to an account where your cash is growing faster than inflation is nibbling away at its value.

"A stocks and shares ISA is also worth considering, as these offer similar benefits as Premium Bonds when it comes to ease of access and tax protection."

Asked if there could be more prize rate cuts this year, Ms Knight said the rate could fall to as low as 3.3% in the fourth quarter, if the Bank of England cuts the base rate again.

She explained: "The Government's mandate requires NS&I not to offer higher rates than private sector savings providers. So, if your bank notifies you that its savings rate is going down, it's reasonable to assume the Premium Bond rate might follow soon after."