National Savings & Investments, the state-backed savings provider, will slash the odds of winning a cash prize on Premium Bonds and reduce interest rates across its fixed and variable savings products.
Nearly 175,000 cash prizes will be removed from its monthly draw from May, reducing the effective interest rate from 1.4 to 1.3 per cent.
In a further blow to savers, Marcus and Saga cut interest rates on two of the UK’s top-paying easy access savings accounts to 1.3 per cent. The lower rates will immediately be applied to new account openings, and to existing customer accounts from March 10.
The bad news was compounded by UK inflation hitting a six-month high of 1.8 per cent on Wednesday, meaning money saved in the vast majority of interest-paying accounts is going backwards in real terms.
“Savers will find their cash in an instant access account is in fact eroding as not one easy access account can beat 1.8 per cent today,” said Rachel Springall, finance expert at Moneyfacts, the comparison website. She said the only accounts able to beat this rate were fixed rate savings bonds where savers would have to tie up their money for more than a year.
“As we have seen many times before, it only takes a few top deals to be cut within the easy access market to spark a domino effect on the rest of its sector,” she added.
About 25m Britons hold savings products with NS&I, which are fully backed by the UK Treasury. UK adults can hold up to £50,000 each in Premium Bonds, and any prizes are tax free.
NS&I blamed the changes on “exceptionally low gilt yields” following a global bond market rally.
Although the two £1m Premium Bond jackpot prizes will remain, the number of £100 and £50 prizes in the monthly Premium Bond prize draw will be halved. Savers will only have five chances of winning £100,000, and the numbers of prizes worth £50,000, £25,000, £10,000 and £5,000 have all been reduced.
Currently, the odds of any £1 bond number winning any prize is one in 24,500. This will decrease to one in 26,000 after the changes are implemented.
NS&I said that interest rates would also be cut across its savings range including Guaranteed Growth and Income Bonds, the Direct Saver, Investment Account and Income Bonds will also see rates cut.
Customers investing in NS&I products are lending to the UK government, which pays them interest and guarantees 100 per cent security on all deposits. Yet by offering favourable rates to private savers, the government is effectively paying over the odds on part of its borrowings, compared to the cost of raising money via the public bond markets which are dominated by pension funds, insurers and other large investors.
Ian Ackerley, chief executive of NS&I, said the changes reflected NS&I’s requirement “to strike a balance between the needs of our savers with taxpayers, and the stability of the broader financial services sector”.
“Reducing interest rates is always a difficult decision,” he added. “We need to ensure our interest rates are set at an appropriate position against those of our competitors.”
Last September, NS&I withdrew some of its most popular retail savings bonds after record-breaking rallies in debt markets.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said the move was “yet another blow for loyal NS&I savers, who treasure the fact their savings are 100 per cent guaranteed by the government and have lived with increasingly uncompetitive rates in order to stick with the institution”.
Premium Bonds are not the only option for savers attracted by a prize draw. This week saw the launch of Nationwide’s new Start to Save account, which pays 1 per cent interest, but offers those who save regularly for three months the chance to win a cash prize of up to £100.
Halifax also offers a monthly prize draw for customers who hold £5,000 or more of savings in qualifying accounts. There are three monthly prizes of £100,000, plus 100 savers will win £1,000 and a further 1,500 will get £100.
Additional reporting by Leke Oso Alabi
This article has been republished since original publication to record interest rate cuts by Marcus and Saga
