Get ready for Premium Bond and savings rates cuts

At the beginning of August, the Bank of England (BoE) voted to cut the base rate from 5.25 per cent to 5 per cent. Savers will need to consider the impact of this decision on the interest they earn on their cash. 

Savings account rates had started to drop in advance of the cut, although what happens next will depend on the pace of further base rate cuts from the BoE in the next few months. Meanwhile, National Savings & Investments (NS&I) has overshot its fundraising target, raising the spectre of further cuts to Premium Bonds' prize fund rate.

Saving account rates 

Savings rates still look attractive, with the best one-year fixed rate account offering 5.25 per cent and the best easy-access account 5.20 per cent, according to research firm Moneyfacts. These are provided by the Union Bank of India and Ulster Bank, respectively. But Moneyfacts data shows there has been a 0.25 percentage point cut on average savings rates across the in the past few weeks. 

Moneyfacts finance expert Rachel Springall says variable rates will likely drop "in the coming weeks" as the market "slowly considers the base rate cut impact". She adds: "Savers should review their easy-access accounts and switch if they are getting a poor return on their hard-earned cash."

However, rate cuts are unlikely to be excessive for now. Mark Hicks, head of active savings at Hargreaves Lansdown, argues that what really matters for savings accounts is expectations of future rate cuts. “If the Bank of England decides to cut rates twice and then pause, we should see minimal disruption to the savings market. More consistent rate cutting of four or more would drive greater savings rate change,” he adds. 

He points towards longer-term savings rates as the clearest indication of where the market expects rates to settle. With three-year and five-year fixed savings rates at 4-4.5 per cent, it appears the market is not predicting a significant drop below these levels, Hicks argues.

Premium Bonds 

NS&I exceeded its £7.5bn financing target for 2023-24 by £3.8bn, despite efforts to persuade customers to move money elsewhere. In January, NS&I cut the Premium Bond prize rate to 4.4 per cent from 4.65 per cent, with the expectation that customers would cut back on bonds in response.

But this was less successful than hoped. Sarah Coles, head of personal finance at Hargreaves Lansdown, says investors may be facing “more heavy-handed cuts in the coming months” as a result. NS&I typically follows the lead of the rest of the savings market, so the first cut to the base rate is a further reason to expect a reduction of the Premium Bonds prize rate.

The rate offered by Premium Bonds is far from the best on the market and most savers will be better off elsewhere. It is also worth keeping in mind that the prize rate is not what all savers receive, with each person's effective rate depending on luck and how much they have invested. But Premium Bonds can still be advantageous for some high-income taxpayers.

Rosie Hooper, chartered financial planner at Quilter Cheviot, says: “The appeal of Premium Bonds lies in their tax-free prize winnings, offering a distinct advantage for those subject to higher income tax rates." She suggests Premium Bonds may be a sensible place for higher-rate taxpayers to keep their emergency funds, as long as they also keep some cash savings in an easy-access bank account.