NS&I increases premium bond rate to 2.20%

The Government-backed savings institution increases the rate by 0.80%.

National Savings & Investments (NS&I) increased the prize fund rate on its premium bonds to 2.20% today.

“This is the second increase to the premium bonds prize fund rate that we have made in less than six months,” said Ian Ackerley, Chief Executive at the NS&I.

The last increase saw the rate rise 0.40 percentage points in May, meaning today’s rise is double the previous uplift.

“These changes have helped us ensure that premium bonds remain attractive, while also ensuring that we continue to balance the interests of savers, taxpayers and the broader financial services sector,” said Ackerley.

The latest increase is expected to add £76 million to the prize fund for October, changing the odds for many of its holders.

In particular, the number of £5,000, £10,000, £25,000, £50,000 and £100,000 prizes will almost double, according to the NS&I.

Meanwhile, the odds of each £1 premium bond number winning a prize will improve from 24,500 to one to 24,000 to one.

In essence, NS&I pays a rate of interest on a collective pot of money financed by the premium bond owners. At the time of writing this rate is 1.40%, but will increase to 2.20% from October.

However, instead of paying out this interest proportionately to its bond holders, it divides these funds up as tax-free cash prizes. These prizes differ in value from £25 to £1 million and are allocated to bond holders at random.

Each £1 you invest into these bonds will count as a separate entry for a cash prize, therefore the more you invest the greater chance you have of winning a cash prize.

For a more detailed comparison of how these bonds compare against traditional savings accounts, read our guide.

Investors are advised against purchasing premium bonds to hedge their money against inflation.

This is because the only returns you can make through this form of investment is through the tax-free cash prizes. These returns, therefore, are not guaranteed and, with annual inflation at 9.9%, investors run the risk of their cash devaluing over time.

Suppose you invest the maximum of £50,000 into premium bonds to give yourself the best chance of winning a cash prize. As explained, the returns you could gain could be nothing or something between £25 and £1 million.

If this money was put into today’s top-paying easy access account instead, at a rate of 2.10%, then the investor will be guaranteed an interest payout of £750. Other theoretical examples can be worked out using our calculator.

A premium bond holder can cash in their investment and receive their money within three working days. In comparison, some easy access accounts can pay out your funds instantly.

Therefore, for those looking for more security in their payments, an easy access account can look attractive. Otherwise, investors looking for more risk, and possibly with other money hedged elsewhere, might find premium bonds an enjoyable way to save.