Prize bonds are more popular than ever in Ireland, with a total issued of more than €4 billion. But are prize bonds a good investment?
Firstly, 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 – in fact this savings security is primarily what has driven large annual increases in sales since the 2008 crash, with a record €670 million spent on prize bonds in 2016 alone. 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 €50 to €50,000, with a €250,000 prize draw every three months. As of February 2021, the total prize fund adds up to a notional tax free interest rate of 0.35%.
So, are prize bonds a good investment? In my opinion, no, they are not.
My reasons are …
1. The odds of winning a prize (and thus earning ‘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 €50.
2. The theoretical 0.35% tax free rate of interest is approximately equivalent to a gross rate of 0.5%. Yes this is better than the best deposit rates but your deposit interest is real whereas your prize bond interest rate is notional – you could quite possibly win/earn nothing.
3. This gross 0.5% notional rate of return is skewed higher by the small number 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, 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 a simple global stock market investment.
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.
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 February 2021 – click here for the more info.
If you like this article, try this one: How to get the Best Returns on Savings