Premium Bond holders short-changed

NATIONAL Savings & Investments has failed to pass on the full benefit of the base rate rise to holders of Premium Bonds for the fourth time in a row.

The bank has said it will increase its prize fund rate by 0.2% to 3.2% in December. The latest move is in response to a 25 basis-point rise in the UK base rate earlier this month.

The base rate has risen from 3.5% to 4.75% since November. Over the same period, Premium Bond returns have risen from 2.15% to only 3.2%. NS&I points out that it spared savers two rate cuts when the UK base rate was falling last year and says its products are priced to give 'fair, consistent and value for money returns'.

Bond holders are not guaranteed to receive the prize fund rate - the figure represents an overall payout to all customers.

Due to Government rules, changes to Premium Bond rates are delayed for three months, therefore the latest adjustment will not come until December. Currently, the rate is 2.80% and will rise to 3.00% on 1 October, as a result of the Bank of England's rate increase in June.

Savers can put a maximum £30,000 into Premium Bonds, which pay prizes tax-free. The limit was raised from £20,000 in 2003 sparking a surge of money into the bonds. Those investing the maximum can expect to win 15 payouts a year, with £1m the top prize.

The group estimates the total monthly value of prizes awarded will have risen by nearly 20% from £41.5m in January this year to £61.8m in October.

It said people who had £30,000 invested in the bonds who had average luck could expect to win around 15 prizes, which range from £100 to £1m, a year.

NS&I also said it was reducing the returns it paid on its fixed-rate savings products.

The Treasury-backed group blamed a fall in the rates paid on Government bonds or gilts for its decision.

The move means interest paid on a five-year Fixed Interest Saving Certificate will fall by 0.2% to 3.45%, while interest on one of its two-year certificates will fall by 0.15% to 3.35%.

The returns on Children's Bonus Bonds will fall by 0.25% to 4.45%, while Pensioner Guaranteed Income Bonds will also see rates drop by 0.2%.

But the group also said it was increasing the interest on its variable rate products following the recent rise in the Bank of England base rate.

Returns on products such as its cash mini Isa and Easy Access Savings Account will rise by the full 0.25%.