Premium bond prizes are shrinking: are they still worth it?

Changes to the prize fund will mean savers have less chance of winning the biggest Premium Bond prizes from May.

There will be one fewer £100,000 prize, with only two being handed out, and there will also be two less £25,000 prizes.

The prize cull is happening because National Savings and Investments (NS&I) is cutting interest rates across its product range so that its products are in line with the wider market.

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"The new rates reflect current market conditions and allow us to continue to strike a balance between the needs of our savers, taxpayers and the stability of the broader financial services sector," says Steve Owen, acting chief executive of NS&I.

Premium Bonds are the nation’s favourite savings product with 21 million people holding bonds. The number of prizes handed out each month is dictated by the prize fund rate, which is set to be in line with typical savings rates. It is currently 1.25 per cent but will fall to 1.15 per cent from May.

The odds of winning will still be 30,000 to one, but there will be fewer big prizes. The total value of prizes will drop from £69.5m to £63.8m. There will still be two £1m jackpot prizes handed out each month, but fewer £100,000 prizes and £25,000 prizes.

From May the prizes will be: 2 x £1m, 2 x £100,000, 6 x £50,000, 9 x £25,000, 23 x £10,000, 47 x £5,000 and 1,276 x £1,000.

"We appreciate that savers will be disappointed, but we believe that the new rates present a fair offer to customers, who will continue to benefit from our 100% HM Treasury guarantee on all holdings, as well as tax-free prizes for Premium Bonds," says Owen.

Should you dump Premium Bonds?

A drop in the number of prizes is annoying, but it reflects the fact interest rates on savings have fallen across the board. Any money you hold in Premium Bonds earns no interest, but you have the chance of winning a cash prize each month.

Win a big prize and you will have bagged a huge return on your savings, win nothing and your money is effectively shrinking as inflation eats away at its spending power.

"Ironically with so little interest on cash for savers, Premium Bonds look more attractive – if your savings are returning basically nothing, you might as well opt for the chance of the jackpot prize," Danny Cox, chartered financial planner at Hargreaves Lansdown, told the BBC.

"NS&I will remain popular for their cast iron security but lower interest rates and rising inflation will test savers' patience."

If you would rather have a definite return from an interest rate you could opt to open a current account with Tesco. The bank is paying three per cent interest on balances up to £3,000 until at least 2019.

Alternatively, if you want a guaranteed return and the peace of mind of knowing your money is 100 per cent guaranteed by the Treasury you could open an Investment Guaranteed Growth Bond with NS&I. The three-year accounts will be launched in the spring with an expected 2.2 per cent interest rate.