National Savings & Investments has increased its Premium Bond prize rate to 4.35 per cent for more than 22 million UK bondholders.
The state-backed bank raised the prize fund rate from 3.8 per cent starting with the September draw as it attempts to attract savers after falling behind target.
The Treasury set NS&I a target to generate £15 billion in net financing, give or take £4 billion, in the tax year starting April 1. Sluggish sales forced the bank to increase rates after savers moved deposits to higher-paying commercial alternatives.
This marks the second increase to the Premium Bond prize fund this year, lifting the rate by a total of 1.05 percentage points since April despite the Bank of England keeping its base rate unchanged at 3.75 per cent.
Prize tier changes and odds
The rate hike adds £63 million to the monthly prize fund for September compared to August, pushing total payouts to £497.3 million. The total number of prizes will expand by 308,000 to reach 6.5 million payouts.
Savers will also see a shift in the distribution of prizes across different value tiers. NS&I is reducing the number of £25 prizes by 572,300 while increasing medium and high-value rewards.
The number of £50 and £100 prizes will each increase by 434,921. Thousands more prizes of £500 and £1,000 will be awarded, alongside 12 additional £100,000 prizes and 27 additional £50,000 prizes. The monthly allocation of two £1 million jackpot prizes remains unchanged.
Financial analyst Sylvia Morris predicted earlier this month that NS&I would be forced to raise rates across its product range. She noted that if the current rate increases fail to attract sufficient funds, the bank may need to implement further hikes.
Premium Bonds are a government-backed savings product first introduced 70 years ago. Unlike standard savings accounts, they pay no regular interest and instead enter bondholders into a monthly prize draw where all winnings are exempt from UK income tax.
Fixed-rate bond rate increases
NS&I has also raised interest rates across its fixed-rate Guaranteed Growth Bonds and Guaranteed Income Bonds. The move represents the fourth rate boost for the products this year and the second within three weeks.
Customers holding fixed-rate bonds maturing from August 18 will automatically receive the updated interest rates upon renewal.
Under the new structure, one-year Guaranteed Growth Bonds will pay 4.82 per cent, up from 4.72 per cent. This brings the account just below the top-ranking one-year deal of 4.85 per cent offered by MBNA Bank, which is part of Lloyds Banking Group.
The two-year Guaranteed Growth Bond rate rises to 4.81 per cent from 4.70 per cent, the three-year term increases to 4.83 per cent from 4.68 per cent, and the five-year bond moves to 4.85 per cent from 4.75 per cent.
Fixed-rate Guaranteed Income Bonds have also been increased to pay 4.72 per cent for one year, 4.71 per cent for two years, 4.73 per cent for three years, and 4.75 per cent for five years. The new one-year rate places NS&I at the top of the market alongside Vanquis Bank.
Tax rules for growth bonds
Savers choosing longer-term Guaranteed Growth Bonds must take note of potential tax liabilities. Because these accounts pay out all accumulated interest at maturity rather than annually, the total interest counts toward the personal savings allowance in the single tax year when the bond matures.
By contrast, Guaranteed Income Bonds pay out interest on a monthly basis. This regular payout prevents multi-year interest from bunching into a single tax year.
Variable accounts and pensioner rates
NS&I has also increased interest rates on its variable-rate accounts, including products popular with retirees seeking regular payouts.
The rate on variable-rate Income Bonds, which pay monthly interest and offer easy access to funds, increases from 3.4 per cent to 3.69 per cent.
The rate on Direct Saver, the bank's main easy-access account, rises from 3.45 per cent to 3.75 per cent.
Direct Saver is particularly attractive to individuals depositing large sums because every deposit held with NS&I is 100 per cent guaranteed by HM Treasury. Commercial bank deposits in the UK are protected only up to £120,000 per person per institution under the Financial Services Compensation Scheme.
