Premium Bonds prize rate hiked again but this 4.56pc savings account smashes it | Personal Finance | Finance

The Premium Bond prize rate has increased for the fourth time in a year to hit a 14-year high of 3.15 percent. That is more than triple the rate it paid this time last year.

More than 22 million Britons own Premium Bonds, managed by National Savings & Investments (NS&I), making them the nation’s favourite investment.

The latest surprise hike could make them even more popular as savings rates have peaked in recent weeks.

Premium Bonds are backed by HM Treasury, making this a rock solid place to put your money. So is it time to up your exposure?

The Premium Bonds prize fund rate, the annual return savers get with average luck, increases from 3 percent to 3.15 percent, starting from the February prize draw. 

One year ago, it was a meagre one percent.

The latest increase makes the monthly draw a lot more exciting, with more prizes ranging from £50 to £100,000.

However, the monthly £1 million jackpots are unchanged, with two winners every month.

All prizes are tax free, further improving the return.

NS&I chief executive Ian Ackerley said it was committed to being competitive and giving customers a good return and the latest increases “will provide a welcome boost for savers of all ages”.

Yet it is possible to get a superior return from a standard savings account. This may suit some people much better.

Laura Suter, head of personal finance at AJ Bell, said Premium Bonds now beat the best buy easy access savings account, which sees app-based Chip paying just three percent.

Although best buy savings rates have dipped a little in recent weeks, it is still possible to get a higher return on deposit by locking you money away for a set period.

Shawbrook Bank offers a market-leading fixed rate of 3.95 percent for one year and 4.10 percent a year for two years, while SmartSave pays best buy 4.56 percent for three years. 

This is now one of the best rates on the market, even beating most five-year fixed rate bonds, which usually pay more.

However, Premium Bonds prizes are free of tax, unlike standard high street savings accounts (with the exception of cash Isas).

This could make them attractive to those in danger of breaching their personal savings allowance (PSA), Suter said.

The PSA allows basic rate tax payers to earn £1,000 of savings interest a year before paying income tax, while higher rate taxpayers can earn £500. “As savings rates rise, more will exceed the PSA and pay tax,” she said.

Premium Bonds do not suit those who require a regular, reliable income to fund everyday living costs, as wins are not guaranteed and savers could get nothing.

“For every person who wins £1 million or £100,000, hundreds win nothing,” Suter said.

READ MORE: Martin Lewis explains if savers should lock in fixed rates ‘now’

Another downside is that despite the latest increase, the odds of winning a prize remain fixed at 24,000-to-1 for each £1 bond you hold. 

Suter added: “However, if you do win you are more likely to bag a bigger sum, as the prize fund has been boosted.”

As well as Premium Bonds, NS&I offers other Treasury-backed savings products.

It has now hiked rates on its Direct Saver and Income Bonds, from 2.30 percent to 2.60 percent, while its tax-free Direct ISA rises from 1.75 percent to 2.15 percent.

It also increased the interest rate on its Junior ISA from 2.70 percent tax-free to 3.40 percent, benefiting 80,000 under 18s.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said these hikes are welcome but NS&I is ‘playing catch-up’ after falling behind best buy rates. 

“None of these rates are market-leading, and are a fair way off the pace. For most savers, it is still worth shopping around to get the best possible return on your money.”