NS&I will lift the rate on premium bonds, which determines the size of the prize fund, by only 0.2 points to 3.15% from September even though the Bank of England base rate went up by 0.25 points this month.
This follows similar moves by Skipton and Harpenden building societies, which also failed to pass on the full quarter-point rise to savers.
Building societies have also been squeezing borrowers. Nationwide and Britannia have both pushed up their standard mortgage rates by 0.35 points.
NS&I’s move will affect more than 23m people with premium bonds. Holders are entered into a monthly draw in which they can win a jackpot of £1m, or more than 1m other prizes worth £50 to £100,000. All payouts are tax-free.
The odds of winning a prize are 24,000 to one. They will stay the same in September, even though the rate has gone up, because more people are investing in premium bonds.
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Someone with average luck will in effect earn 3.15% on their money from September. As the returns are tax-free, this is equivalent to 5.25% for higher-rate taxpayers and 3.93% for those in the basic-rate band.
Other variable NS&I rates will go up by the full 0.25 points on September 1, however. They include the Investment Account, which will offer up to 4.05% on £50,000 or more, and the Treasurers Account, which will pay 4.15% on £100,000 plus. Savers with the Ordinary Account will also see their rates go up 0.25 points to 1.2% on £500 or more, and Income Bonds will go up by a quarter point to 4.54%.
Even with the rises, however, most of NS&I’s rates remain poor compared with the best accounts on the market. Anglo Irish Bank pays 5.05% on £500 or more in its easy-access account — 3.85 points higher than NS&I’s Ordinary Account.
In fact, the only NS&I deal that makes it into the best-buy tables compiled by market analyst Moneyfacts is the Direct Isa, an internet and telephone account that pays 5.3% on £1,000 or more.
Sue Hannums at Chase de Vere, an adviser, said: “NS&I tends to trade on the fact that people think it is safe, but you can generally get better rates elsewhere. The Direct Isa is the only truly competitive NS&I account, although its index-linked certificates are a good option for high-rate taxpayers.
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“By not passing the full 0.25 point increase on to premium bond holders, I believe NS&I is taking advantage of the fact that we are a ‘lottery’ generation and we would rather take a chance on a big win than settle for a good interest rate.”
Fierce competition forced many other savings providers, including Yorkshire and Norwich & Peterborough building societies, to pass on the base-rate rise in full on all accounts last week.
The rate on Yorkshire’s Internet Saver account has risen by 0.4 points to 5.1% in the last few weeks.
However, Harpenden building society increased rates on its Freestyle and Mini Isa accounts by only 0.15 points and Skipton building society also passed on just 0.2 points of the rise on some accounts.