NS&I cuts the Premium Bond prize fund

The prize fund available to Premium Bond holders is being slashed and the odds of winning will drop to from 24,000 to one to 26,000 to one next month. What's more, the annual interest rate on the entire savings pot will drop from 1.5% to 1.3%.

The changes will come into effect from 1st August, National Savings & Investments (NS&I), the Government organisation behind the bonds, confirmed today.

Lower chances of winning

As the overall prize fund is being reduced, there will be a smaller chance of winning on the Premium Bonds.

In July, the total value of the tax-free prizes was £57,099,325. This is predicted to fall to £49,321,500 in August.

And the total number of prizes will drop to 1,751,061, from 1,903,314.

NS&I says the change is happening because of falling interest rates on savings accounts. This has led to an increase in demand for the bonds and has put NS&I in danger of taking in more money than it needs to support the government's borrowing.

Last month NS&I also dropped the interest rate on its Income Bonds, Direct Saver and Direct ISA - a move that will come into force next month.

[July's Premium Bonds winners]

Value of prizes

Premium Bonds are split up into different amounts, and from August these will change as the overall fund falls.

The table below is a prediction of how the amount of prizes will fall.

Value of prizes	Number of prizes in July 2013	Number of prizes in August 2013 (estimate)
£1,000,000	1	1
£100,000	5	3
£50,000	9	6
£25,000	20	11
£10,000	49	30
£5,000	97	58
£1,000	1,142	789
£500	2,426	2,367
£100	33,552	11,891
£50	33,552	11,891
£25	1,831,461	1,724,014

Falling savings rates

Savings rates have been falling steadily this year, mainly thanks to the government’s Funding for Lending Scheme (FLS). This has given lenders cheap access to government funding which means they don’t have to rely on money from savers. There are now no accounts which beat the current rate of inflation.

Premium Bonds provide an alternative way to create some extra income and are popular among savers. But as they don’t pay interest, there is no guarantee you’ll earn anything extra and there’s now even less chance of winning.

Alternative ways to earn interest

One alternative to traditional savings accounts which has been growing in popularity this year is peer-to-peer lending. This is a relatively new concept whereby individuals lend to each other and cut out the middle man – the bank.

Companies such as Zopa and Rate Setter have seen huge increases in customer numbers as savers take advantage of the increased interest rates on offer.

They work by giving the borrower a cheaper way to lend and the lender an opportunity to earn interest rates of around 5% - far higher than any standard account is offering.

However, right now, peer-to-peer lenders aren’t covered by the Financial Services Compensation Scheme (FSCS) which will put some people off. This protection will be implemented at some point and until then some providers, such as Rate Setter, have a back-up fund to cover any shortfalls.

[Compare the interest rates on offer from peer-to-peer lending sites]