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Savers are being offered the prospect of larger prizes on premium bonds as National Savings & Investments ramps up efforts to draw in cash.
Announcing changes on Tuesday, the state-owned provider said its monthly prize fund rate would grow by 0.8 percentage points to 3 per cent in January as it sought to remain competitive and boost the number of customers invested in premium bonds above the current 25mn.
Around 570,000 customers holding income bonds and direct saver products will see their interest rates increase from 1.8 per cent to 2.3 per cent, levels last seen in 2009 and 2010.
“Change to the premium bonds prize funds rate, as well as the changes to direct saver, income bonds and investment account, will mean that our products are priced appropriately,” said NS&I chief executive Ian Ackerley.
NS&I is improving its offering to savers after it struggled to attract funds during a period of low interest rates when retail investors sought higher returns at commercial deposit-takers and in the equity markets.
As far as premium bonds are concerned, NS&I is betting that some savers will continue to find the prospect of large one-off wins attractive even when deposit rates are rising. Investors can save up to £50,000 in the product, with winnings exempt from income and capital gains tax.
Odds for the product will change very little, with only 15,750 more prizes compared to the 4.98mn handed out in December. NS&I estimated three times as many prizes between £5,000 and £100,000 would be won next month.
Changes came ahead of Thursday’s rate-setting meeting at the Bank of England, where interest rates are expected to increase by 0.5 per cent to 3.5 per cent. NS&I’s decision reflects November’s historic 0.75 per cent rate rise, up to 3 per cent.
NS&I’s increase still lags behind the best available on the market. Nationwide offers 4 per cent on a one-year fixed rate bond, while a three-year fix with lesser-known Beehive Money, part of Nottingham Building Society, returns 4.65 per cent.
All available rates lag behind inflation, now running at 10 per cent, leaving savers with negative real rates, meaning that they are losing money after allowing for inflation.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, warned would-be premium bond buyers they were sacrificing certain returns. She highlighted the guaranteed interest rates of up to 2.8 per cent on some easy-access products.
Anna Bowes of Savings Champion, a money comparison website, said customers using NS&I’s postal-only investment account would be disappointed with a small rise from 0.40 per cent to 0.60 per cent.
The product, which is no longer promoted, is used by older investors. Bowes stressed they could put their cash elsewhere, including in NS&I’s Income Bonds.
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