Savers are being advised to withdraw their investments from National Savings & Investments (NS&I) due to a recent reduction in the Premium Bonds prize fund for the third time this year.

Effective January, the prize rate for Premium Bonds—which currently holds £126.5 billion for 22.5 million savers—will drop to 4 per cent. This follows a decrease from 4.4 per cent to 4.15 per cent earlier this month, and down from 4.65 per cent in February.

Premium Bonds do not yield traditional interest; instead, the prize rate reflects the average return a saver can anticipate from prizes over one year. Each month, savers participate in a lottery where prizes range from £25 to £100,000, including two £1 million jackpots.

Additionally, two other easy-access accounts will also face rate reductions, with all deposits remaining 100 per cent guaranteed as NS&I is backed by the Treasury. Starting December 20, the direct saver account will offer 3.5 per cent, down from 3.75 per cent, while the income bonds, which provide monthly payouts, will decrease from 3.75 per cent to 3.49 per cent. Both of these accounts saw cuts on November 20, sliding from rates of 4 per cent and 3.93 per cent respectively.

As of March, NS&I reported holding approximately £44.4 billion across these two accounts and a total of £228.7 billion overall.

Recommendations for Savers

All three NS&I accounts are now offering less than the top easy-access rate of 4.85 per cent available from Principality Building Society, and the leading easy-access ISA rate of 5.18 per cent from Plum. There are currently 21 easy-access accounts and 12 easy-access ISAs providing better returns than 4.4 per cent.

Savers can invest up to £50,000 in Premium Bonds, with all prizes free from tax. In contrast, interest earned on traditional savings accounts (excluding ISAs) is taxable. Basic-rate taxpayers have a £1,000 annual tax-free interest allowance, whereas higher-rate taxpayers have £500, and additional-rate taxpayers do not receive an allowance.

The decrease in NS&I’s prize rate stems from a reduction in the payouts for prizes. The number of £100,000 prizes will fall from 89 to 82 starting in January, while £50,000 prizes will decline from 177 to 166, lowering the total prize pool by around £32 million to £432 million.

James Blower of The Savings Guru commented, “It’s time for savers to move away from Premium Bonds. The timing of NS&I’s cut feels off as the Bank of England and financial markets are anticipating a more gradual decrease in interest rates, yet it announces a consecutive reduction.”

He added, “Given that the Bank of England’s base rate is poised to stay at 4.75 per cent next month, this move seems unwarranted. With easy-access rates reaching up to 4.85 per cent, more favorable options are available elsewhere.”

NS&I enjoys popularity due to its government backing, unlike commercial banks and building societies, which cover only £85,000 per institution under the Financial Services Compensation Scheme (FSCS).

Mark Hicks from Hargreaves Lansdown noted, “The only appeal of NS&I is the security it offers compared to the FSCS limit. Better returns are definitely available elsewhere, and if your holdings are below £85,000, there is no reason to invest in NS&I products.”

Current Savings Rates Overview

Savings rates experienced a prolonged period at record lows but surged significantly over nearly two years before starting to decline again in 2023. The Bank of England’s base rate, impacting savings rates and managing inflation, peaked at 5.25 per cent in August 2023, then was adjusted to 5 per cent in August and further reduced to 4.75 per cent last month.

A year ago, the leading easy-access rate was 5.22 per cent, alongside a top one-year fixed rate of 5.9 per cent. The best current one-year fixed rate is 4.8 per cent from Ziraat Bank, accessible via the savings platform Raisin UK.

Last December, top two-year and three-year rates were both at 5.5 per cent, with the best five-year rate also at 5.5 per cent. Presently, the highest rate available for all three time horizons is 4.6 per cent from Atom Bank, indicating that a saver with £10,000 in the best one-year account would end up £110 worse off after a year.

However, there’s a silver lining; anticipated base rate reductions by the Bank were influenced by unexpectedly high inflation and repercussions from the government’s budget in October, prompting rates to rise slightly over the last month.

As of October 31, the leading three-year fixed rate stood at 4.55 per cent, while the best five-year fixed rate was 4.4 per cent—rates still favorably outperforming those offered by Atom Bank.

Smart Strategies for Savings

Several fixed ISA rates have seen increases, benefiting those looking to withdraw from Premium Bonds to avoid taxes on their interest. Annual ISA allowances stand at £20,000, which can be divided between cash and stocks and shares.

The top one-year ISA rate currently is 4.52 per cent from Castle Trust Bank, with increases in two, three, and five-year rates since early November. The highest two-year ISA rate is 4.39 per cent from Secure Trust Bank, while a three-year ISA offers 4.36 per cent from the same institution. The best five-year rate available is 4.17 per cent from Castle Trust Bank, all of which accept transfers from previous ISAs accumulated over past tax years.

Hicks added, “While 2024 poses challenges for savers, signs indicate that the steepest rate declines may be behind us. Recent budgetary pressures might lead to a more favorable outlook for savers in 2025 compared to earlier predictions for 2024.”

For higher or additional rate taxpayers, the lower ISA rates might yield better outcomes once taxes are accounted for. For instance, a higher-rate taxpayer with £12,500 would generate £600 in the 4.8 per cent one-year account from Ziraat Bank, versus £565 in the 4.52 per cent one-year ISA from Castle Trust. However, the taxpayer would incur £40 in tax on interest from the Premium Bonds, reducing their total return to £560.

Blower noted that one-year fixed-rate accounts are currently the most sought-after by The Savings Guru users, followed by easy-access accounts and one-year ISAs. While the latter options tend to offer higher returns, they may decrease in value next year as changes from the base rate slowly take effect.

For those spotting attractive fixed rates, acting quickly is advisable. Data from Moneyfacts reveals that the average duration of fixed-rate offers has dwindled to 35 days—its shortest span since March. Typically, individuals can open an account 14 days ahead of making a deposit, which allows time to secure advantageous deals.