Premium Bond prize rate to be cut from May draw onwards

The number of large prizes that Premium Bond holders can win each month will fall sharply from the next draw in early May.

National Savings & Investment (NS&I), which offers the bonds, says it will reduce the total prize fund rate from 1.25% to 1.1% as of May 2017.

In order to keep the odds of winning any prize at 30,000-to-1 while paying out a lower overall sum it is axing some of the biggest prizes.

It means the total number of £100,000 prizes up for grabs will fall from three a month to two.

Similarly, the number of £25,000 winners will drop from 11 to nine, while £10,000 prizes plummet from 31 to 23. And there will be a huge drop in the number of smaller prizes each month.

The two £1 million prizes will remain unchanged.

Changes in full

See the table below for how the new prizes will be allocated from May 2017.

What are Premium Bonds?

[SPOTLIGHT] Premium Bonds are the UK's most popular form of savings product.

Unlike a traditional account, which pays out a regular rate of interest, the bonds are entered into a monthly draw, with prizes ranging from £25 to £1 million.

Sadly, the value and number of prizes on offer in each draw have been repeatedly reduced in recent years.

For example, the odds of winning any prize were lengthened from 26,000-to-1 to the current 30,000-to-1 as part of a reshuffle last summer.

Why are prize values falling?

It's not just Premium Bonds that will be cut by NS&I: the interest rates on its Direct ISA and Income Bonds will both drop from 1% to 0.75% in May, while its Direct Saver will dip from 0.8% to 0.7%.

Steve Owen, acting chief executive at NS&I, says it has been forced to make the changes in response to the Bank of England's decision to cut the Base Rate from 0.5% to 0.25% last August.

"We have taken the time to absorb the impact of reduction and subsequent changes across the savings market.

"The new rates reflect current market conditions and allow us to continue to strike a balance between the needs of our savers, taxpayers and the stability of the broader financial services sector.

"We appreciate that savers will be disappointed, but we believe that the new rates present a fair offer to customers, who will continue to benefit from our 100% HM Treasury guarantee on all holdings, as well as tax-free prizes for Premium Bonds.

Is it worth keeping Premium Bonds?

One of the biggest draws of Premium Bonds has always been that prizes are tax-free.

However, the Personal Savings Allowance introduced last April lets you earn up to £1,000 a year in interest without the taxman taking a cut.

Statistically you're unlikely to earn more than this with Premium Bonds, even if you invest the maximum amount £50,000.

This makes all other savings accounts far more appealing, especially when you consider the rates on the top savings accounts are far more generous than the 1.1% average return paid out on Premium Bonds.

If you have a small sum to set aside, you can earn 5% on your first £2,500 worth of savings with Nationwide, or 3% on the first £1,500 with TSB.

For larger savings pots, the Santander 123 current account pays 1.5% on balances up to £20,000 (minus a £5 monthly fee), while the top fixed-rate savings accounts pay more than 2% with a maximum savings limit of £100,000.

If your main interest in Premium Bonds is the dream of winning a life-changing sum, then you might be better off using the interest you earn from a top-paying savings account to play the lottery instead, where the odds of a huge payout are more generous.