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 that pay out better interest rates.

NS&I is by far the most successful savings company in the country, with 25 million highly loyal customers.

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

Premium Bonds do not pay interest, but carry a ‘price fund rate’ of 3.15 percent per annum.

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

The savings company has reintroduced two old favourites, Guaranteed Growth Bonds and Guaranteed Income Bonds, which were NS&I’s second most popular deals before being closed to new customers in 2019.

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

Guaranteed growth bonds pay 4 percent interest on a one-year deal, paid at maturity. Guaranteed Income Bonds pay 3.9 percent interest in monthly installments.

Both deals were pulled from sale to new customers in 2019, when they paid 1.5 percent and 1.45 percent respectively, though existing customers were allowed to roll the deals over to lower interest rates. At the time, the price percentage of Premium Bonds was 1.4 percent per annum.

But now Guaranteed Growth and Guaranteed Income Bonds are paying 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 money – and how much money you need to save.

Starting with the interest rate, it may seem like a good idea to choose guaranteed growth and guaranteed income bonds over premium bonds.

That’s because Premium Bonds work like a lottery, so savers can win more than the average prize percentage of 3.15 percent, or perhaps much less.

Starting with guaranteed growth bonds, someone saving a minimum of £500 would earn £20 a year in interest, falling to £19.50 a year with guaranteed income bonds.

But someone with £500 to save in Premium Bonds probably wouldn’t have won anything at all after a year.

That’s because the odds of winning anything are 24,500 to one, so a £500 holding has about an 80 percent chance of winning nothing and a 22 percent chance of winning the £25 minimum prize.

Of course, with £500 that saver can also win the £1million top prize – and that’s the main appeal of Premium Bonds, not the 3.15 per cent prize percentage.

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

A saver with £1,000 would earn £40 from guaranteed growth bonds and £39 from guaranteed income bonds. With Premium Bonds, someone with £1,000 has a 60 percent chance of winning nothing and about a 40 percent chance of winning the minimum £25 prize.

A lot also depends on how much you need the interest on your money, according to Anna Bowes of Savings Champion.

“Having a 3.9 percent or 4 percent warranty after 12 months can give you more peace of mind,” Bowes explains.

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

Another consideration for savers with large pots of money is that they may have to pay taxes on deals with guaranteed income and growth – while profits from Premium Bonds are tax-free.

This is thanks 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 over £25,000 would result in interest in breach of this.

For higher rate taxpayers, that fee drops from £1,000 to £500, meaning deposits of £12,500 are in breach of the PSA.

Finally, Premium Bonds are a form of easy access deal, meaning all cash held can be withdrawn within the term. But cash is locked up for an entire year with guaranteed growth and income bonds.

What NS&I says

The savings company is honest about the fact that if you want a regular income, or if you’re worried about your money beating inflation, Premium Bonds probably aren’t for you.

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

With guaranteed income and growth bonds, NS&I says the deals aren’t for people who need quick access to their money, but are better for those who want a guaranteed annual interest rate.