Over 20 million Premium Bond holders will see their chances of winning prizes lengthened next month as National Savings & Investments (NS&I) reins in its prize fund.
Funds have been flooding into NS&I in recent months as the Funding for Lending Scheme continued to reduce the returns on conventional savings accounts.
The Treasury-backed institution recently announced a reduction on its cash ISA rate, from 2.25% to 1.75% in September, after filling its quota (read more).
Now it has moved to make Premium Bonds less attractive for savers as it attempts to establish its equilibrium in the savings market.
Premium Bonds do not pay interest but instead qualify the bondholder for a monthly draw, with the chance to win amounts from just £25 all the way up to £1 million.
Returns are also tax-free, which is an added bonus, given that tax on savings interest is dragging average rates further away from a rising rate of inflation.
But in cutting the monthly prize fund by 14% to £49 million and the number of monthly prizes by 8% to 1.75 million, NS&I is lengthening the odds on winning from 24,000/1 to 26,000/1.
The number of £100,000 prizes is to drop from five to just three, while the number of £50,000 prizes will reduce from nine to just six. As a result, the average yield on the bonds will fall from 1.5% to 1.3%.
NS&I said that Premium Bonds had become overly attractive as banks and building societies had cut savings rates. The service pointed out that it had not reviewed its terms since 2009, despite a low Bank of England base rate.
"The cut to the prize fund is 20 basis points, but this is far below the cuts that have been made among our private sector competitors," said NS&I chief executive, Jane Platt.
"To ensure we stay within our Net Financing target – and in light of our framework to balance the needs of our savers, taxpayers and the stability of the broader financial services sector - we now need to reduce the Premium Bond prize fund rate."
NS&I will cut Premium Bond prizes from next month as the bonds become more attractive to savers.
The service’s 2012/13 results show net financing of £666 million, which follows a revision of the target from £3 billion down to £1 billion last December.
NS&I said that 88% of customers had provided a positive rating for the service, and it proved the top performer in a mystery spot-check undertaken earlier this year.
"In a very unpredictable market environment we have behaved responsibly and met all our financial and customer service targets," Ms Platt said.
"At the same time we have transformed our business and entered the final stages of our modernisation programme, offering enhanced online and phone services to more of our customers."
Keith McDonald
Which4U Editor
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