Premium Bonds savers warned as this NS&I rule means there could be further rate cuts

Premium Bonds savers frustrated to be hit with another cut in the prize fund rate have been warned further drops could be on the way.

NS&I announced recently the prize fund rate will fall from the current 3.8 percent down to 3.6 percent from the August draw. This means the total amount paid out will be lower relative to the total amount of Bonds that go into the monthly draw.

The odds of winning for each £1 Bond will remain at the current 22,000 to one but should you bag a prize, there will be less chance of getting a big cash prize.

NS&I dropped the prize rate from the April draw, down from 4 percent to 3.8 percent, as well as in January and in December last year.

As the provider keeps axing the rate, a money expert has warned there could be further cuts coming up this year.

Amy Knight, personal finance expert at NerdWallet UK, said: "If the Monetary Policy Comittee [at the Bank of England] votes for two more rate cuts this year, the Premium Bonds rate could fall by another 0.3%, potentially settling as low as 3.3% in the fourth quarter."

She explained how the actual rules that determine the Premium Bonds rate could mean the rate has to be reduced again: "The Government's mandate requires NS&I not to offer higher rates than private sector savings providers.

"So, if your bank notifies you that its savings rate is going down, it's reasonable to assume the Premium Bond rate might follow soon after."

The Bank of England last dropped the base interest rate in May, with the rate falling from 4.5% down to the current 4.25%.

Guidance on the NS&I website about Premium Bonds sets out: "The prize fund rate is variable so it can change at any time."

Another factor to consider when looking at the prize fund rate is how it compares with inflation. With the 3.6% rate from the August draw, this is barely above the latest inflation figure, at 3.5%.

Ms Knight said: "In the ongoing battle to stay on top of rising costs, earning a higher rate of interest than the current CPI rate is the key to 'beating inflation'.

"The best rates are often found on fixed-term savings accounts and fixed-rate bonds, where you commit to leaving your savings untouched for a set period of time. These can provide much more reliable returns than Premium Bonds, provided you won't need to withdraw early."

Despite the rate cut, some savers may find Premium Bonds continue to be a good option for their savings. The finance expert said: "The main appeal of Premium Bonds is that they are a safe option for savings you can't afford to lose.

"Being Government-backed, NS&I financial products are among the lowest-risk options out there. While the growth may be disappointing, Premium Bonds can offer a low-risk safety net to balance out higher-risk investments where your money is at the mercy of financial markets.

"For someone saving for a specific life event in the short to medium term, Premium Bonds are still part of many people's savings strategy."