Following cuts to its direct savings accounts in June, NS&I has announced that the annual Premium Bond prize fund will drop by 0.2 per cent to 1.3 per cent from 1 August 2013. This means the odds of each £1 bond number winning a prize will change from 24,000 to one to 26,000 to one.
The £1m jackpot will remain. However, according to NS&I's estimate, the number of big cash prizes worth £5,000 or more each month will fall from 181 to 109, a difference of 72 prizes. There will also be 107,447 fewer £25 cash prizes and 43,332 fewer £100 and £50 prizes.
Jane Platt, chief executive of NS&I, said: "Rates across the savings market have fallen over recent months, resulting in NS&I savings being increasingly attractive. To ensure we stay within our Net Financing target - and in light of our framework to balance the needs of our savers, taxpayers and the stability of the broader financial services sector - we need to reduce the Premium Bond prize fund rate."
We previously wrote that the July cash prize fund rate of 1.5 per cent looked attractive for higher-rate taxpayers, for whom it was the equivalent of 2.5 per cent in a taxable account. However, the new prize fund rate of 1.3 per cent is equivalent to 2.16 in a taxable account for a higher-rate taxpayer, which is not so competitive compared with savings best buys and will not beat consumer price inflation at 2.9 per cent.
Savers willing to lock their money up for two years can get 2.35 per cent from Kent Reliance Building Society (http://www.krbs.com/).
The new 1.3 per cent Premium Bond prize fund rate is not what investors in Premium Bonds will get, of course - the nature of the tax-free prizes is that some investors will win a lot more than 1.5 per cent and some will win a lot less. Investors who don't win prizes will lose out to inflation.
As higher-rate taxpayers cannot beat inflation via taxable savings accounts, Premium Bonds may still look attractive.
The effect of changes in the Premium Bond prize fund rate
| Value of prizes | Number of prizes in July 2013 | Number of prizes in August 2013 (estimate) |
| £1,000,000 | 1 | 1 |
| £100,000 | 5 | 3 |
| £50,000 | 9 | 6 |
| £25,000 | 20 | 11 |
| £10,000 | 49 | 30 |
| £5,000 | 97 | 58 |
| £1,000 | 1,142 | 789 |
| £100 | 33,552 | 11,891 |
| £50 | 33,552 | 11,891 |
| £25 | 1,831,461 | 1,724,014 |
Source: NS&I
