NS&I has announced that it was reducing the annual Premium Bond prize fund rate by 0.20% to 1.30%1 from this month.

The move increases the pressure on NS&I to justify a bond which increasingly is looking expensive. The odds of each £1 Bond number winning a prize will change to 26,000 to 1 from 24,000 to 1.

NS&I sets its interest rates and the Premium Bond prize fund rate to balance the interests of its savers, taxpayers and the stability of the broader financial services sector. It has taken the decision to reduce the

The reduction in the Premium Bond prize fund rate reflects current lower interest rates across the savings market. Last month, NS&I announced it was reducing the interest rates on its Income Bonds, Direct Saver and Direct ISA with effect from 12 September 2013.

Premium Bonds will still pay out circa 1.7 million tax free prizes each month and have a monthly prize fund of £49 million in August 2013. Premium Bonds can be managed online, by phone and by post, and customers can now opt to have prizes paid directly into their bank account by BACS.

Instead of paying interest, Premium Bonds are entered into monthly prize draws to win prizes from £25 to £1 million. The monthly prize fund is set by calculating one month’s interest on the total value of all eligible Bonds, at the annual prize fund rate.

However, as the chances of winning decrease significantly, savers may be better off parking their money in an interest-bearing account.