National Savings & Investments (NS&I) has raised interest rates on its variable products, allowing for customers to see more money in their savings accounts.

NS&I has announced that the premium bonds prize fund rate will increase from 4% to 4.65% from the September draw. This is the highest rate it has been since March 1999, adding £66m to the prize fund.

Premium bonds odds are also set to improve to 21,000 to one to 22,000 to one, their best level since the April 2008 prize draw.

Savers holding income bonds, direct saver, direct ISA, junior ISA and investment accounts will also be able to benefit from these rate increases and will see their savings rise immediately.

The interest rate paid to direct saver customers will increase from 3.4% to 3.65%, with rates on income bonds will increase to 3.59% gross/3.65% AER from 3.4% gross/3.45% AER.

The direct ISA rate will increase to 3% tax-free from 2.4% tax free, with the junior ISA rate increasing from 3.65% to 4%.

Chief executive officer at NS&I, Dax Harkins, said: “These upcoming increases show that we’re supporting savers up and down the country. Premium bonds are one of the nation’s favourite savings products, so increasing the prize fund rate to its best level since 1999 and improving the odds means that more people will have the chance to win prizes each month.

“These rate increases will help ensure that our savings products remain attractive to customers, whilst ensuring that we continue to balance the needs of savers, taxpayers and the broader financial services sector.”

Head of personal finance at AJ Bell, Laura Suter, added: “It was inevitable that NS&I would increase rates as rising competition in the savings market means it has fallen out of favour with savers who would prefer guaranteed rates elsewhere. In June, NS&I clocked up its third month of falling inflows and actually saw no net inflows, as any money savers put with the provider was wiped out by withdrawals. Taking a punt on premium bonds was a more attractive gamble when interest rates were rock bottom. But now savers are giving up returns of 5% on easy-access accounts for the chance they might win big on Ernie, which is a tougher call to make.

“When NS&I increases its rates, it can add more prizes to the prize fund and change the odds, meaning that you are also more likely to win a prize. Interestingly this is the second time in two months the provider has also improved your odds of winning, up to 21,000 to 1. In comparison, the odds in May last year were only 34,500 to 1, so a decent improvement in just over a year. But crucially, there are still only two chances each month to win the ultimate £1m prize.”

Head of retirement analysis at Hargreaves Lansdown, Helen Morrissey, also said: “Anyone considering premium bonds needs to understand the price they pay. In an average month, a typical bond holder will win nothing, and you are potentially missing out on more interest by placing your savings elsewhere. With inflation still running hot, you also need to be aware that the spending power of your savings is being eroded more quickly than if you had opted for a product paying a better interest rate.

“However, the chance to win big is a powerful incentive and this is why around 21 million people in the UK hold premium bonds.”

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