Not-so-premium bond

National Savings & Investments are cutting the prize money on premium bonds.

In June, National Savings & Investments (NS&I) announced reductions of between 0.4% and 0.5% from 12 September on three of its variable rate offerings, the most significant being a cut in the Income Bond rate from 1.75% to 1.25%. At the time, some of the press coverage commented that the move increased the relative appeal of premium bonds, where the underlying prize money equated to 1.5% tax-free interest.

Last month NS&I reacted to the resultant inflows into premium bonds by cutting the prize money rate to 1.3% from 1 August. The lower rate will result in two changes:

  • The chances of any one bond winning a prize in the monthly draw will fall from 1:24,000 to 1:26,000.
  • The distribution of winnings will alter (see chart), with an even higher proportion (98.1%) of successful bonds earning their owners the minimum prize of £25.

1.3% tax-free doesn’t look bad if you are a higher rate taxpayer – you would have to earn 2.17% gross interest to match it, which beats any instant access account currently available. However, the 1.3% is theoretical and what you would actually earn depends upon lady luck. The statisticians say that the skew of prizes and the minimum of £25 means on average you will earn less than 1.3%.

P.S. If you are thinking of that £1 million jackpot, then don’t plan your retirement around it: the odds of winning the top prize in the monthly draw are now less than 1 in 45,500,000,000.

30th August 2013