Rise for Premium Bond prizes

NATIONAL Savings & Investments has announced it will put up its Premium Bond prize fund by 0.2% to 2.6%,rather than reflecting the full 0.25% rise in the Bank of England base rate earlier this month.

It has defended the move saying that it shielded savers from much of the falls in the UK base rates last year, when the base rate fell by 0.25% in February and July, the Premium Bond rate only passed on a total of a 0.25% cut.

However, NS&I will delay the rise until June. It says it is contractually obliged by Government legislation to give three months warning of changes to the rate, although a spokeswoman told This Is Money the system was ?not ideal‘ and that it might be reviewed.

The delay in the increase will cost customers an estimated £18m, although they would have also felt the benefit of delays in passing on falling rates from 2000 to 2003.

NS&I raised the maximum investment threshold from £20,000 to £30,000 last May, sparking a boom in Premium Bond sales. The amount invested in 2003 was around £7.5bn – nearly double sales in 2002. A total of £23bn is now invested in the bonds.

The good news is that the odds of each bond winning a prize will fall from 30,000-1 to 27,500-1 when the prize fund rises in June. It means that someone with the maximum investment in Premium Bonds of £30,000 could, with average luck, can expect to win 13 rather than 12 tax-free prizes a year.

Because bond prizes are paid tax free, the 2.6% rate will be equivalent to 3.25% interest for basic rate taxpayers and 4.33% for those in the higher band.

Savings rates on NS&I accounts will rise by between 0.1% and 0.25%. But the returns paid on its fixed-rate bonds will come down by 0.2% to 0.25%, following a fall in yields from Government bonds or gilts.

Rates on the recently-launched Easy Access Savings Account will rise by the full quarter percentage point to between 1.25% and 3.8% depending on the amount saved.

Rates on the Ordinary Account, which is held by 13m people, will rise by only 0.1% to a paltry 0.35%. NS&I is writing to customers, offering the chance to switch to the new Easy Access Savings Account. It says the account is now closed to new customers and that five million people have less than a pound on deposit in any case.