NS&I REDUCES INTEREST RATE ON PREMIUM BONDS
NS&I announced on 24th July that it is reducing the annual Premium Bonds prize fund rate by 0.20% to 1.30%* on 1 August 2013. Also on that date, the odds of each £1 Bond number winning a prize will reduce to 26,000 to 1 from 24,000 to 1. NS&I is set a Net Financing target each year by HM Treasury. For 2013-14 this has been set at £0 with a range of £2 billion either side of this, meaning that they need to broadly balance inflows and outflows. The decision has been made to reduce the Premium Bonds prize fund rate to stay within this range, and to balance the interest of savers, taxpayers and the stability of the wider financial services sector.
Interest rates have fallen over recent months in the savings sector, resulting in NS&I savings being increasingly competitive. The reduction in the Premium Bonds prize fund rate reflects current lower interest rates across the savings market.
The effect of changes to the Premium Bonds prize fund rate
As a reminder, instead of paying interest NS&I, Premium Bonds give investors the chance to win £1 million every month and over 1.7 million other cash prizes. NS&I is backed by HM Treasury, so the investment with us is 100% secure whether you win a prize or not. Inflation can however erode the value of your savings. Premium Bonds can be managed online, by phone, and by post and customers can now opt to have prizes paid directly into their bank account by BACS with notification by email.
Premium Bonds within a portfolio
The security and liquidity offered by Premium Bonds make them a useful part of clients’ contingency or emergency fund, particularly for higher-rate taxpayers as the prizes are tax-free.
It is important to ensure that you do not hold more than you need in your contingency fund, either as cash savings or in Premium Bonds, as inflation is likely to erode the real value of your investment (RPI increased to 3.3% in June according to the Office for National Statistics). If you can afford to invest for the long term, and accept a degree of risk, equity backed investments offer both greater opportunities for capital growth and for income with the FTSE100 currently yielding in excess of 3% per annum.
In light of the reduction in the Premium Bond interest rate and falling savings account rates, now might be a good time to review the size of your contingency fund? If you wish to discuss this, to ensure that you are doing the right thing, then please do contact us for a review.
*Please check www.nsandi.com for latest rates.