NS&I brings back old accounts with BETTER rates than Premium Bonds: Should you switch?

National Savings and Investments Premium Bonds are the UK’s most- popular savings deal – but the Treasury-backed provider has just reintroduced two savings products which pay better interest rates. 

NS&I is the country’s most successful savings firm by a long shot, with 25 million highly loyal customers signed up.

Around 22.4 million of those people have Premium Bonds, a Treasury-backed savings deal with a monthly lottery-style draw that pays out prizes ranging from £25 to £1 million. 

Premium Bonds pay no interest, but have a ‘prize fund rate’ of 3.15 per cent a year.

That is the deal’s best rate in 14 years – but it is still outstripped by the latest products in the NS&I stable.

The savings firm has re-introduced two old favourites, Guaranteed Growth Bonds and Guaranteed Income Bonds, which were NS&I’s joint second most-popular deals before they were pulled for new customers in 2019.

But now both deals are back, and with supercharged interest rates.

Guaranteed Growth Bonds pay 4 per cent interest on a one-year deal, paid at the end of the term. Guaranteed Income Bonds pay 3.9 per cent interest in monthly installments.

Both deals were pulled from sale for new customers in 2019, when they paid 1.5 per cent and 1.45 per cent respectively, though existing customers were allowed to roll the deals over onto lower interest rates. At the time, the Premium Bonds prize rate was 1.4 per cent a year.

But now Guaranteed Growth and Guaranteed Income Bonds pay vastly improved rates. So is it time for NS&I fans with Premium Bonds to consider switching?

Battle of the bonds

The answer is that it all depends on how badly you need the interest and whether you need quick access to your cash – as well as how much money you have to save.

Starting with the interest rate, it might seem like a no-brainer to pick Guaranteed Growth and Guaranteed Income Bonds over Premium Bonds.

That is because Premium Bonds work like a lottery, so savers might win more than the 3.15 per cent average prize rate, or might get far less.

Starting with Guaranteed Growth Bonds, someone saving the minimum £500 would earn £20 a year in interest, dropping to £19.50 a year with Guaranteed Income Bonds.

But someone with £500 to save in Premium Bonds would probably have won nothing at all after one year. 

That is because the odds of winning anything are 24,500 to one, so a £500 holding has around an 80 per cent chance of winning nothing and a 22 per cent chance of winning the minimum prize of £25.

Of course, that saver with £500 could win the top prize of £1million too – and that is the main appeal of Premium Bonds, not its 3.15 per cent prize rate.

NS&I has rebalanced its Premium Bonds prizes to encourage more higher payouts, but over a short time frame the odds are still stacked against savers with lower amounts.

A saver with £1,000 would earn £40 with Guaranteed Growth Bonds and £39 with Guaranteed Income Bonds. With Premium Bonds, someone with £1,000 has a 60 per cent chance of winning nothing and a roughly 40 per cent chance of winning the minimum £25 prize.

Much also depends on how much you need the interest on your cash, according to Anna Bowes of Savings Champion.

‘Having 3.9 per cent or 4 per cent guaranteed after 12 months may give more peace of mind,’ Bowes explained. 

‘That may be more suitable than hoping you might win more than that with Premium Bonds. If you do rely on that interest, then Premium Bonds might not be the right product, though it is a very personal situation.’

Another consideration for savers with large cash pots is that they may have to pay tax on Guaranteed Income and Growth deals – whereas Premium Bonds winnings are tax free.

This is due to the Personal Savings Allowance, which says that the first £1,000 of all interest earned in a year by basic-rate taxpayers on savings is tax-free.

With Guaranteed Growth Bonds, balances of more than £25,000 would result in interest that breaches this.

For higher-rate taxpayers that £1,000 allowance falls to £500, meaning deposits of £12,500 would breach the PSA.

Finally, Premium Bonds are a form of easy-access deal, meaning any cash held can be withdrawn within the term. But cash is locked away for a full year with Guaranteed Growth and Income Bonds.

What NS&I says

The savings firm is upfront that if you want a regular income, or are concerned about your money beating inflation, Premium Bonds are probably not for you.

However, NS&I points out the tax-free benefit of any winnings, as well as the two alluring top prizes of £1million every month.

With Guaranteed Income and Growth Bonds, NS&I says the deals will not suit people who may need quick access to their cash, but are better for those who want a guaranteed yearly interest rate.