NS&I cuts rates. Premium Bonds could be next

The interest paid on British Savings Bonds from National Savings & Investments (NS&I) has fallen to less than 4 per cent, with fears that Premium Bond prizes could be next in line for a chop.
It is a blow to savers just a month after the Treasury-backed bank’s two-year and five-year bonds came back on sale and comes as another cut to the Bank of England’s base rate of interest is expected this year.
NS&I offers two versions of the British Savings Bond — income and growth. The income bond pays a monthly income and the growth bond locks away your money until the end of the fixed term. You can invest between £500 and £1 million in each.
NS&I has reduced the rate on its two-year growth bond from 4.6 per cent to 4.25 per cent and its two-year income option from 4.5 per cent to 4.17 per cent.
The rate on its three-year growth bond is down from 4.35 per cent to 4 per cent, while the income version is down from 4.26 per cent to 3.93 per cent. The five-year growth rate is down from 4.1 per cent to 3.9 per cent and the income version is down from 4.02 per cent to 3.83 per cent.
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The changes follow weeks of interest rate cuts in the savings market after Bank rate fell in August from 5.25 per cent, which it had been held at for a year, to 5 per cent. Analysts expect it to fall further this year.
NS&I said the rate cuts on its bonds reflected the changing savings market and helped it to “balance the interests of savers, taxpayers and the broader financial services sector”.
While NS&I has an obligation to raise money from savers to fund the Treasury, the advantages it has from being back by the government mean it is not allowed to offer competitive rates that could harm commercial banks’ business. All NS&I deposits are guaranteed by the Treasury, while only £85,000 of ordinary bank accounts is protected by the Financial Services Compensation Scheme (FSCS), which pays out if the firm holding your money goes bust.
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About 24 million people have more than £200 billion saved with NS&I, making it Britain’s favourite bank for cash savings. About 558,000 have money in its British Saving Bonds, worth about £29 billion.
Mark Hicks from the investment platform Hargreaves Lansdown said: “It was always a matter of when these cuts were going to come, rather than if. These fixed-rate cuts mirror the falls that we’ve seen in the rest of the savings market. NS&I has shifted gear in to stay in the middle of the road.
“Last year, NS&I distorted the market with a 6.2 per cent one-year rate, but these moves imply that it isn’t in any rush to do the same again. It’s not desperate to raise significant funds by paying more than it needs to.”
There is also speculation that NS&I may cut rates on its variable accounts — these include its Direct Saver, which pays 4 per cent, its Income Bonds, paying 3.93 per cent, and its Direct Isa, paying 3 per cent.
Premium Bonds, which don’t pay interest but give out out tax-free prizes every month, may also become less generous. The prize rate, the average return for bond holders, is 4.4 per cent, down from 4.65 per cent at the start of the year.
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Hicks added: “For anyone holding Premium Bonds this isn’t a great sign. There’s every chance NS&I could cut its variable rates sooner rather than later, which could mean the Premium Bond prize rate gets less generous.”
The most you can get on a two-year bond is from Ziraat Bank via the savings platform Raisin, at 4.72 per cent paid on maturity. The highest rate on a two-year bond is 4.7 per cent from RCI Bank, which pays on a monthly basis.
The top paying three-year bond is 4.52 per cent with Hodge Bank and customers have the option of getting income monthly or annually. Over five years, the top paying bond is also with Hodge Bank and pays 4.37 per cent, with interest paid monthly or annually.