News has been released by NS&I that the Premium Bonds prize fund rate will be reduced to 3.6% from the August draw. In the analysis below, Laura Suter, director of personal finance at AJ Bell, looks at how the rate stacks up against alternative savings products – and highlights a few client scenarios where Premium Bonds are still likely to offer appeal.
“The Premium Bond prize fund is being cut again, taking it down to rates last seen two years ago. The prize fund rate will be cut to 3.6% from the August prize draw, down from the current 3.8% and down from a peak of 4.65% seen in September 2023.
“The rates are now significantly below the top rates in the market, meaning savers are paying a hefty premium for the safety and brand name of NS&I. The top easy-access account on the market pays 5% interest, meaning that someone with £20,000 of savings will be sacrificing £280 of interest a year by opting for Premium Bonds. But that also assumes they get the average return on the account – which many don’t.
“The Premium Bond ‘prize fund rate’ is intended to give savers some comparison with how the account compares to normal savings accounts. But it could be misleading for many savers, as the ‘effective rate’ is the average return you would get based on having average luck in the prize draw. Clearly not everyone has ‘average’ luck, otherwise the prizes would be handed out equally to every saver. The fact that there are some very large prizes also skews the figures – as it means that for every person who wins £1 million or £100,000 there will be hundreds who win nothing.
“Savers with money in Premium Bonds should really think about whether the account is right for them. Considering many Premium Bond holders will never win a prize and the average expected return is lower than the top easy-access account, savers could well be better off with a guaranteed return elsewhere.
“A Freedom of Information (FOI) request obtained by AJ Bell recently revealed that nearly two-thirds of Premium Bond holders, equivalent to just under 14.4 million people, have never won a prize. There is a whopping £127.7 billion sat in Premium Bonds, with the average overall holding coming in at £5,406. However, the average holding for the 5.1 million Premium Bond holders who won in the last 12 months sits at £23,397, with 80% of those winners winning more than once during that period*. When you factor in that many people will have been holding Premium Bonds for decades, perhaps receiving them as gifts when they were young, that means they may have missed out on significant returns in a higher paying cash account or by investing.
“Despite interest rate cuts, these accounts are still likely to continue to be very popular as they are backed by NS&I and many savers have huge brand loyalty to the organisation. There are a few groups where Premium Bonds are a very attractive option, but for most the safety of a regular interest rate will be better, and savers may want to shop around for the best rates on offer.”
*Based on data obtained by AJ Bell from the NS&I via a Freedom of Information request, accurate as of 18 March 2025. The number of current holders who have not won a prize is based on data from February 1994 onwards and includes new holders who were not eligible as their Bonds were not beyond one month purchased.
The savers who may consider Premium Bonds
The higher-rate saver
“Premium Bonds’ big selling point used to be that any money you win in prizes is tax free. That’s still the case, but since the introduction of the personal savings allowance most people haven’t had to worry about tax on their savings income anyway. The allowance means that basic-rate taxpayers can earn £1,000 interest on their savings before they pay tax, while higher-rate taxpayers can earn £500.
“As interest rates have risen more people will start to hit this allowance. Assuming their cash was in the current top-paying easy access savings account earning 5%, a basic-rate taxpayer would need to have £20,000 in savings to breach their tax-free allowance, while a higher-rate taxpayer would only need to have £10,000.
“On top of that, anyone who is in the highest rate tax bracket gets no savings allowance, and so will pay 45% tax on any of their savings income. For these highest earners, or those who have already breached their allowance, the tax-free nature of Premium Bonds becomes far more attractive.”
The gambler
“The Premium Bond indicative rate is based on the average chance of winning a prize in the draw each month. However, for all those people who never win anything there will be someone who wins the top £1 million prize. If the savings rates on standard accounts don’t excite you then you can gamble on winning one of the top Premium Bond prizes – after all, someone has to win it.
“However, anyone in this camp needs to be aware that they could win nothing, and so get no return on their money. Equally, your chances of winning depend on how much you hold in Premium Bonds. So, someone with £100 saved is much less likely to win than someone who has £20,000.”
The very risk-averse
“Another big appeal of Premium Bonds is that they are run by the government, so they are seen as the safest-of-safe places to keep your money. However, we’re all protected by the Financial Services Compensation Scheme (FSCS), which covers up to £85,000 of money per person, per financial institution. This means that your money is theoretically as safe in any other bank with FSCS protection as it is with Premium Bonds.
“However, because NS&I is government-run it can’t go bust, whereas a bank could go bust and then you’d have to reclaim your money through the compensation scheme. It’s a marginal difference but some people will feel much safer with their savings being with the government.”