The premium fund for bonds will be cut in March, which will be a setback for millions of savers.
National Savings & Investments (NS&I) said interest rates will fall from the current level of 4.65 percent, the highest since 1999, to 4.4 percent.
The cut follows 18 months of increases and comes amid signs that the Bank of England will start cutting official interest rates as early as May.
Laura Suter, director of personal finance at AJ Bell, said: ‘This is the biggest sign yet that the interest rate bonanza enjoyed by savers is coming to an end.’
Premium bonds are the most popular savings product in Britain, with 22 million people owning them.
National Savings & Investments said premium bond rates will fall from the current level of 4.65% – the highest since 1999 – to 4.4%
NS&I, which is backed by the Government, has already exceeded its £7.5 billion fundraising target for the financial year.
According to official figures released in November, the company had raised £9.8 billion by the half-year.
Inflows soared after it launched its flagship one-year guaranteed growth bond last summer, which paid 6.2 percent to those who bought the bond.
But now NS&I has decided to cut rates to turn the tide as it comes perilously close to reaching its £10.5 billion fundraising cap.
Andrew Westhead, retail director, said: ‘These changes reflect our need to balance the interests of our savers, taxpayers and the stability of the wider financial services sector.
In a dynamic savings market, it is important that our rates are set appropriately relative to our competitors as we strive to achieve our annual net funding target.”
The reduction means that a total of around £444.4 million will be up for grabs for savers during the March prize draw, which is down from £475.5 million in January.
Greig Bingham of actuarial consultancy OAC said the gains were likely to be smaller.
“The odds of winning a prize remain the same: 21,000 to 1,” he explained.
He added: ‘An increased number of smaller prizes will lead to a reduction in the prize fund, with the average winner now more likely to win a smaller prize and therefore generate a lower return on their savings.’
There are still two £1 million jackpot prizes available, but the number of £100,000 prizes is estimated to be reduced from 91 to 85.
And the number of £50,000 prizes to be won in the monthly draws will drop from 182 to 170.
The £25 prize, the lowest that can be won, is the only one that will increase in number.
From March there will be an estimated 1,435,338 £25 prizes available, up from 1,037,784.
The prize fund rate is now 0.82 percentage points lower than that of the market-leading easy-access account.
Savers who pay into Metro Bank’s direct access savings account receive 5.22 percent interest on their savings.