Could premium bond rates rise? NS&I busy fundraising after earning just £3.3bn in first half of 2024/25

National Savings and Investments (NS&I) could increase premium rates on premium bonds, experts say, as it has raised just £3.3 billion in the current financial year.

In the March 2024 Spring Budget, NS&I’s net funding target for 2024-2025 was set at £9 billion, with headroom of plus or minus £4 billion.

This means NS&I still has a long way to go before it reaches its fundraising target, which has a range of £5 billion to £13 billion.

If NS&I lags behind on fundraising, it can respond by raising savings rates, as it did when it launched its best-selling 6.2 percent guaranteed growth and income bonds in March 2024.

NS&I can also respond by changing the prize fund rate for Premium Bonds, as it did when it reduced the prize fund rate to 4.15 percent this month so as not to exceed its fundraising target.

NS&I raised £11.3 billion in net funding for the government in the 2023/2024 financial year, the Treasury-backed bank revealed in its latest annual report and accounts.

It means it has exceeded its funding target of £7.5 billion, with a headroom of plus or minus £3 billion for a range of £4.5 billion to £10.5 billion.

The 6.2 percent guaranteed growth and guaranteed income bonds played an important role in this, as they proved extremely successful with savers.

NS&I chief executive Dax Harkins said: “Last summer we were significantly behind our net funding target – despite successive rate increases across our variable and fixed products.

‘In response, we have launched new one-year issuances of our popular guaranteed growth bonds and guaranteed income bonds.’

Experts say premium bond yields could rise despite the recent cut by NS&I.

James Blower, founder of wesbite Savings Guru, said: ‘NS&I are actually a bit behind in their funding. “But if they repeat last quarter’s performance over the next two years, they’ll end up with around £8.5 billion, so right on target for the £9 billion target they have.”

A reduction in the prize pool has already been announced at Premium Bonds, with the pot for the December draw falling by 0.25 percent. It will be 4.15 percent, down from the current level of 4.4 percent, and the odds of winning a prize will increase from 21,000 to one to 22,000 to one.

NS&I said the change to the prize fund was in response to a “changing savings market” and the need not to exceed the net funding target set out by the Treasury.

At the same time, NS&I announced that it would reduce the interest rate on its Direct Saver Bonds from 4 percent to 3.75 percent from November 20.

Income bonds will also fall from 4 percent to 3.75 percent. It is the first time that NS&I has reduced interest rates for Direct Saver and Income Bonds since November 2020.

Blower said: ‘This seems to indicate that NS&I is taking into account the almost certain cut in the base rate next Thursday, where it will be a huge surprise if the base rate does not fall by 0.25 percent to 4.75 percent.

‘Given that Premium Bonds now make up almost 60 percent of NS&I’s portfolio, they are the most important product that needs to change if NS&I really wants to have an impact on flows. I suspect that they will now largely bring the interest rate on Premium Bonds in line with the base rate.

‘What is really interesting about the results is that there was an outflow of balances from NS&I in both quarters. The “growth” consists of accrued interest on accounts.

‘Given that interest rates will almost certainly fall in 2025, this figure will decline as there will be less accrued interest. Although this is unlikely to have an impact this financial year, it could have an impact in future years as NS&I may have to increase interest rates, or reduce them by less than the base rate, to both maintain the accrued interest to increase as to soften the outflow of balances. ‘