Why you should move your cash out of NS&I

Savers have been urged to ditch National Savings & Investments after it cut the Premium Bonds prize fund for the third time this year.
The prize rate on the bonds, which hold £126.5 billion for 22.5 million savers, will fall to 4 per cent from January, having dropped from 4.4 per cent to 4.15 per cent this month. It was 4.65 per cent in February.
Premium Bonds do not pay interest, but the rate is the average return a saver can expect to win in prizes over a year. Savers are entered into a monthly lottery where prizes range from £25 to £100,000, plus two £1 million jackpots.
Two other easy-access accounts, where all deposits are 100 per cent guaranteed because NS&I is owned by the Treasury, will also have rates cut.
NS&I’s direct saver will pay 3.5 per cent from December 20, down from 3.75 per cent, and the rate on its income bonds, which pay out monthly, will go down from 3.75 per cent to 3.49 per cent. Both were also cut on November 20, from 4 per cent and 3.93 per cent respectively.
Some £44.4 billion was held in these two accounts at the end of March, according to the bank’s latest accounts, while NS&I held a total of £228.7 billion.
All three NS&I accounts pay less than the best easy-access rate of 4.85 per cent from Principality Building Society, and the best easy-access Isa rate of 5.18 per cent from the savings app Plum. There are 21 easy-access accounts and 12 easy-access Isas paying more than 4.4 per cent.
You can hold up to £50,000 of Premium Bonds and all prizes are tax-free. Interest earned on savings held in ordinary accounts (excluding Isas) are subject to tax. Basic rate taxpayers get a tax-free interest allowance of £1,000 a year; higher rate taxpayers get £500 and additional rate payers get no allowance at all.
The cut to NS&I’s prize rate comes from a reduction in the prizes it will pay out monthly. The number of £100,000 prizes will drop from 89 this month to 82 in January and the number of £50,000 prizes will be cut from 177 to 166. The total prize pool is down by about £32 million to £432 million.
James Blower from the comparison site The Savings Guru said: “It’s time for savers to ditch Premium Bonds. NS&I’s cut looks badly timed. Just as the Bank of England and financial markets are expecting a gentler fall in interest rates, it announces a second successive cut.
“With the Bank of England base rate likely to remain at 4.75 per cent next month, this looks like an unnecessary move. With easy-access rates as high as 4.85 per cent, there are significantly better returns elsewhere.”
NS&I is also popular because of the Treasury backing, whereas with commercial banks and building societies only £85,000 per institution is guaranteed under the Financial Services Compensation Scheme (FSCS).
Mark Hicks from the investment firm Hargreaves Lansdown said: “The only reason to be in NS&I is the security and safety it brings compared with the FSCS limit. You can certainly get better returns elsewhere and if you have less than £85,000 then there is no reason to be invested in their products.”
• Best savings accounts
Savings rates were at historic lows for more than a decade, went up quite dramatically over almost two years, then began falling back in 2023. The Bank of England base rate, which affects savings rates and is used as a tool to control inflation, hit 5.25 per cent in August 2023 but was cut to 5 per cent in August this year and reduced again to 4.75 per cent last month.
This time last year the best easy-access rate was 5.22 per cent and the best one-year fixed rate was 5.9 per cent. The best one-year fixed rate now is 4.8 per cent from Ziraat Bank, through the savings platform Raisin UK.
Last December the best two-year rate was 5.8 per cent, the best three-year rate was 5.5 per cent and the best five-year also 5.5 per cent. Now the best you can get is 4.6 per cent from Atom Bank over all three time periods. That means a saver with £10,000 in the best one-year account will be £110 worse off after a year.
• Best cash Isas
It’s not all bad news, though. The Bank rate had been expected to fall, but higher than expected inflation and the fallout from the government’s budget in October has changed those expectations. And this means that rates have edged up in the past month.
On October 31 the best three-year fixed rate was 4.55 per cent while the best five-year fix was 4.4 per cent — the Atom Bank rates mentioned above beat both of those.
Some fixed Isa rates have also risen, which is good news for those who want to ditch Premium Bonds and avoid paying tax on their interest. You have a £20,000 annual Isa allowance that you can split across cash and stocks and shares.
The best one-year Isa rate is 4.52 per cent from Castle Trust Bank, while the best two, three and five-year rates are up since the start of November. The highest two-year Isa rate is 4.39 per cent from Secure Trust Bank and you can get 4.36 per cent on a three-year Isa from the same bank. The highest five-year rate is 4.17 per cent from Castle Trust Bank. All accept transfers in from old Isas built up over past tax years.
Hicks said: “2024 has been a challenging year for savers but there are signs that the biggest falls in rates may be behind us. With the budget adding some inflationary pressures, 2025 is looking better for savers than it was at the start of 2024.”
If you are a higher or additional rate taxpayer, then the lower rates on Isas might work out better after tax is factored in. A higher rate taxpayer with £12,500 would earn £600 in the 4.8 per cent one-year account from Ziraat Bank and £565 in the 4.52 per cent one-year Isa from Castle Trust, but would pay £40 in tax on the interest from the bond. This would cut their overall return to £560.
Blower said that one-year fixed rate accounts were the most popular with users of the Savings Guru site, followed by easy-access accounts and one-year Isas. While easy-access accounts and Isas pay higher rates, they are likely to be lower next year when the Bank rate cuts filter through.
If you see a good fixed rate, move fast. The average shelf life of a fixed-rate dropped to 35 days last month, according to the data firm Moneyfacts — the shortest since March. You can normally open an account 14 days before you need to make a deposit, which could help you to safeguard a good deal.