Chancellor Jeremy Hunt is likely to announce National Savings & Investment’s (NS&I) net financing target for the new tax year in the Spring Budget, which could impact the number of Premium Bond prizes in each draw - potentially spelling good news or bad news for savers.
Among the rumoured National Insurance cuts and fuel duty freeze extension, we could see details about NS&I in the small print of tomorrow’s Budget statement.
Premium Bond holders have enjoyed six months of a historic-high prize fund rate of 4.65% from September to last month, with NS&I adding more than £71 million to the prize pot.
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The odds of winning also improved from 22,000 to 1 to 21,000 to 1 for every £1 Bond.
But this month the prize fund rate dropped, with 73,000 fewer Premium Bond prizes on offer and a new prize fund rate of 4.4%.
“More than 24 million savers will be hanging onto Jeremy Hunt’s every word for good news on Premium Bonds in this week’s Budget. They suffered a cut to the prize fund this month, and need to know whether this is the last of the bad news, or just the start,” says Sarah Coles, head of personal finance at Hargreaves Lansdown.
We look at what tomorrow’s Budget statement on the net financing target could mean for Premium Bonds.
What could the Spring Budget mean for Premium Bonds?
Before the beginning of each tax year, the Treasury sets out a net financing target for NS&I to reach, with the aim to increase government funds. This is typically contained in the Budget documents.
Experts say if the target is set above this year’s £7.5 billion, savers could be in for a treat as the savings provider will need to raise more cash.
As we’ve seen in the past, NS&I could then increase the prize fund rate on Premium Bonds, or alternatively launch a competitive savings account to attract more savers - like last year’s 6.2% one-year fixed bond.
However, if the new target falls below the current one, NS&I will need to reduce the amount it raises, potentially meaning further prize fund rate cuts.
“This could be miserable news for Premium Bond savers who will stand a lower chance of winning a prize,” Coles warns.
There is a chance the government won’t make a huge change to the fundraising target from April, in which case Premium Bond holders can expect the prize fund rate to hold steady in the short term.
But, with predictions that the Bank of England (BoE) could lower the base rate by the middle of this year, the next move for Premium Bonds is likely to be another cut later this year.
Coles explains that NS&I “has to balance three things: it needs to raise enough money for the Treasury as cost-effectively as possible; it’s expected to offer a decent deal for savers; and, it tries not to disrupt the rest of the savings market by offering anything significantly better than the going rate.”
That said, the government-backed savings provider reached its £7.5 billion fundraising target within six months in the current tax year, due to its success with the 6.2% one-year fixed bond that it launched last summer.
The product beat all of the best savings deals at the time, but it was pulled after five weeks on the market. The high demand gave NS&I a major boost to reach its target.
After reaching its financing target so early on, NS&I didn’t need to attract any new cash. This resulted in a prize fund rate cut to 4.4%, and £23 million less in the Premium Bond prize pot from March.
Are Premium Bonds still worth it?
With interest rates expected to fall this year, this is likely to have a knock-on effect on Premium Bonds, so it’s a good time to think about whether these savings products are right for you.
Remember, as well as potential fund rate cuts in the future, you are also not guaranteed to win any Premium Bonds in each draw.
Coles puts the odds of winning into perspective: “In the March draw, with £25 of bonds, your chances of winning the £1 million jackpot were just under one in over 2.5 billion. In an average year, the average person holding £1,000 in bonds will win nothing.”
Whereas if you put your cash in a savings account, you are earning interest on your balance.
The best easy-access savings account currently offers 5.2%. This is a variable rate and can change in the future.
If you’re willing to fix your cash, you are guaranteed to earn that rate for a specific period of time. For example, just today Lloyds Bank-owned MBNA hiked its one-year fixed savings bond from 5% to 5.27% AER, putting it at the top of our best buy guide.
Find out more about Premium Bond alternatives.
