Premium Bonds savers warned of 'big problem' ahead of major NS&I change

Premium Bonds customers have been warned there is a major problem with the savings scheme that they should think through.

Savers may be reconsidering their options as the prize fund rate for Premium Bonds is dropping again from the August draw.

The rate is falling from 3.8 percent down to 3.6 percent, following cuts in April and in January this year. Tom Francis, head of Advice at Octopus Money, warned customers: "Premium Bonds are a fun, safe way to save, but if you're serious about growing your money, they're probably not the best place to park your cash."

He said there is a major drawback with the scheme: "The big problem is they don't pay interest. So, unless you win a prize, and most people don't, your money just sits there, quietly shrinking in value over time.

"Inflation is doing its thing in the background, and without interest to offset it, you're effectively losing money the longer it sits."

The value of your holdings stays the same even if you don't win a prize, but as the cost of living increases, this means your money is effectively losing value.

Research by Octopus Money found that almost a third of Premium Bond holders expect to win a prize within six months, but on average people wait 3.5 years to get their first prize.

Mr Francis said: "That's a long time to earn nothing, especially when you could be getting over 4.5% interest with a decent cash ISA.

"If it's safety you're after, a cash ISA could be a much better bet. Your money's protected, you earn interest, and many accounts are offering upwards of 4% right now. Some fixed-rate options are even higher."

He said that some people may still find Premium Bonds are suitable for them if they like the idea of winning a prize, but it's good to have a diversified savings approach.

He explained: "A mix of a high-interest cash ISA and, if you're comfortable with a little more risk, a stocks and shares ISA could put your money to much better use.

"You can invest up to £20,000 tax-free, and over time, this will give you a fighting chance of beating inflation and actually growing your pot."

The Premium Bonds prize draw takes place at the start of each month. You can increase your chances of winning a prize by buying more Bonds. Each £1 Bond has an equal chance of being paired with a prize.

The odds of winning for each £1 Bond are currently 22,000 to one and will stay at this level even with the rate cut. Over the past five years, 94 percent of the winners of the £1million jackpot held over £10,000, while 75 percent held over £25,000.

Looking at the winners for 2024, almost 90 percent of winners won less than £2,000, with just 0.32 percent taking home more than £10,000.