Prize bonds are more popular than ever in Ireland, with a total in issuance of close to €5 billion. But are prize bonds a good investment?
First, what are they and how do they work?
Prize bonds are non-interest bearing lottery bonds. Your capital has a government guarantee that it will be repaid on redemption (after a minimum 3 month holding period). That’s the good news – the attraction of savings security along with the tax free nature of prizes. Those two features have driven huge annual sales of around €500m in recent years.
The bad news is that no interest is paid. Instead, the holder is entered into a weekly prize for a series of tax free cash prizes ranging from €75 to €50,000, with a €500,000 prize draw every month. Since October 2023, the total prize fund has been equivalent to a notional tax free interest rate of 1%.
So, are prize bonds a good investment? In my opinion, no, they are not.
My reasons are …
1. The odds of winning a substantial prize (and thus earning an attractive rate of ‘interest’) are pretty remote. The prize bonds organisers have said you have a one in five chance of winning something in any one year – but that could be a prize as small as €75.
2. The theoretical 1% tax free rate of interest is approximately equivalent to a gross rate of 1.4%. Yes this is better than the best deposit rates but your deposit interest is real whereas your prize bond interest rate is notional – you will probably win/earn less than that.
3. This 1% notional rate of return is skewed higher by the small number (12 a year) of very large prizes and is unrepresentative of probable returns. It is therefore necessary to put in a fairly substantial investment, in excess of €10,000, just to get a reasonable return within a reasonable period of time.
4. Finally, but most importantly of all, if you are saving money for the future and already have a rainy day fund in a bank account, prize bonds are not the answer as they are just another version of an inflation-sapping deposit account. Instead you should be investing for the medium to long term in simple global stock market investments.
Like lottery tickets, prize bonds are fine for gifts and for a little bit of excitement with small sums, but if you are serious about wanting a better return on long term savings, they are not for you.
Since I wrote this article, The Irish Times published this piece, calling Prize Bonds “a pretty lousy investment”.
If you really want to get into the weeds, a Boards.ie user has been recording his prizes on €25k invested in 2011 here.
Do you want to gain a better return without taking crazy risks? Call me on 01 276 0006 or 086 850 8577 or email fonz@moneysmart.ie
Note: The last Prize Bonds rate change was in October 2023 – click here for the more info.
If you like this article, try this one: How to get the Best Returns on Savings