In bad news for millions of UK savers, the Treasury-backed National Savings & Investment (NS&I) bank has reduced interest rates on savings accounts and slashed NS&I premium bond prizes.
UK customers had been enjoying the benefits of premium bonds savings accounts like the chance to win a cash prize. In fact, NS&I’s premium bonds were the UK’s most popular ‘savings’ accounts, attracting over 20 million customers.
But in September 2020, NS&I announced some pretty drastic cut backs to their offers in response to difficult economic times. As a result, many savers are now looking at dramatically reduced NS&I interest rates and chances of winning prizes.
So, if you are someone who is thinking about the best time to buy premium bonds, you may want to consider an alternative to premium bonds altogether.
What are NS&I premium bonds?
This type of bond was first set up in the UK back in 1694. Tasked with fixing the country’s ruinous war debt they invented a highly effective vehicle for incentivising saving through lottery-style prize winnings.
Premium bonds are prize-linked savings products, which means that savers are entered into regular draws for cash prizes. Essentially like a lottery – but your savings can be taken back, even if you don’t win prizes.
What has changed with NS&I premium bonds?
Normal saving interest is not paid on NS&I premium bonds. Instead, the premium bonds interest rate transfers interest into a central prize fund, which is then paid out to premium bonds holders. Every £1 invested has a pre-determined chance of winning a prize, from £25 to £1 million – or of course, nothing. Currently (until November at least) the chance of winning any prize is 24,500 to 1.
The reductions are twofold – first, the NS&I interest rate has reduced from 1.4% to 1%. That means less money goes in the pot. Secondly the chance of winning has gone down – and from December 2020 will be 34,500 to 1.
So all in all, premium bonds are now less attractive as the chance of winning is a lot lower. Whilst being a little less fun, it must be said that they remain a treasury-backed brand which many will still see as a safe haven to invest their cash. Important in difficult times. But then again, all financial institutions in the UK are legally responsible for securing your savings, so this is hardly a unique benefit.
Alternative prize-linked savings
If earning straightforward interest in standard savings accounts sounds dull to you, then you aren’t alone. Millions of other UK savers also prefer the buzz of winning prizes. So, the good news is that there are still plenty of alternative options to NS&I for prize draw savings.
And some alternatives claim to have much better odds of winning prizes than NS&I Premium Bonds. For example, the Family Building Society’s Windfall Bond claims to have odds that are around six times better than NS&I Premium Bonds. But this comes at a hefty price tag – bonds costs £10,000 a piece. You do get interest on savings though, but only at the Bank of England base rate (currently 0.10%). Compare that to the best available regular savings accounts that currently deliver 3% interest.
Halifax and Nationwide also offer prize linked savings schemes, with Halifax not even requiring any special account – but you do need to have at least £5,000 in their (or the Bank of Scotland’s) qualifying savings account.
Another promising way to grow your money, is to consider investing in a stocks and shares Individual Savings Account (ISA). With this, you invest your money in various financial markets (you often have a choice about which), and your money and interest grows as the value of the markets rise.
If you are up for doing investment research and have the nerves to pick your own stocks, you can use apps like eToro and Freetrade to select and buy stocks (Freetrade also offers an ISA). This can be a lot of fun, but as those apps will make you aware when you sign up – your capital is at risk and in a worst-case scenario you could lose it.
If you want a little more guided experience, a robo-adviser account (digital platform with algorithm-driven financial planning) or standard (human managed) broker account could be for you.
Tax free ISA’s remain popular, but interest rates have tumbled on cash ISAs, in line with the Bank of England’s reductions in the base rate. You can expect to get around 1%, which whilst tax free, is still only 1%. If you have an existing ISA and are shopping around, look for an account where you can ‘transfer in’ your previous ISA balance without losing your tax free savings.
High interest savings
And of course, if you simply want to maximise interest and minimise hassle, you can put your savings into a high interest savings account. But invariably there are restrictions on high interest accounts, like limiting your withdrawals or requiring monthly deposits.
Don’t forget to budget
Using an app like Money Dashboard can help you work out exactly how much you can save. It can also show you where you are spending and help you to set financial goals.