Ernie is a prize meanie now

Falling interest rates don't just deal a blow to savers - they also spell bad news for the UK's 23m premium bond holders.

National Savings is lengthening the odds against the punter as part of a rejig of its payouts system, to reflect the three Bank of England base rate cuts since the start of the year. At the moment, the equivalent of 4% of the £15bn invested in premium bonds is paid out annually, in the form of prizes awarded each month.

Earlier this year, this prize fund was 4.25% of the total but from August it will be cut to 3.75% and will fall again to 3.5% in September. This figure is going down because it tends to follow the ups and downs of the main Bank of England base rate.

These cuts to the prize fund mean your chances of winning will shrink. At the moment each £1 premium bond unit has a one in 20,000 chance of winning a prize - from £50 up to the jackpot of £1m - but from September, the odds against winning any prize are being lengthened for the first time in more than a year, to 21,500-1. "People like to win prizes and we try and keep the odds of winning pretty static. Unfortunately we just could not maintain the odds with those prize fund reductions," says a National Savings spokesman.

He says the organisation doesn't expect to see a fall in the amounts invested in premium bonds as a result, and points out that sales are very strong (running at £300m a month) with the number of bonds exceeding 15bn for the first time last month.

Over the past few years, many big savers have bought the maximum individual amount of premium bonds - £20,000 - because the average return of 4%, completely tax-free, compares well with a 6% savings account, which only gives a higher-rate taxpayer 3.6% per annum net.

But evidence is emerging that some of those who have held premium bonds for many years are now becoming disenchanted with the returns they have been getting of late.

Craig Wetton at independent financial adviser Chartwell Investment Management says that a number of its customers have been grumbling that the returns they enjoyed in the past were a lot better than now. "We have a lot of clients who have done their premium bonds up to the hilt, and we've had inquiries from people saying: 'Enough is enough'," he says.

National Savings counters by saying that "people's luck will change".

You can invest from £100 to £20,000 in premium bonds. Each £1 unit you hold has a "separate and equal" chance of winning the £1m jackpot, and at a time of low interest rates, many people have been willing to forfeit the interest they would have earned with a bank or building society and put some of their nest egg cash into premium bonds.

This month - which happens to be the 44th birthday of the winner-picking machine Ernie (it stands for Electronic Random Number Indicator Equipment) - a total of 765,157 prizes totalling £51m were handed out, including eight £100,000 prizes, 17 £50,000 prizes and more than 697,000 £50 prizes. The £1m jackpot was scooped by a bondholder in Greater Manchester.