What percentage interest rate is paid in prizes on Prize Bonds

[Fortune]

It's behind a pay wall so don't know the gist of her argument but normally she would be strident about steering clear of such bad investments with terrible retu

She's saying there's more to life than investment returns, and prize bonds give a little fun to people and also enable self employed people to avoid spending the money they put aside for their tax bill. Also says that they're a good hedge as cash (somehow).

There's also a mention of them not being like wasting money on lottery tickets. But that go me thinking. She says she has hundreds of bonds. Plucking a number out of the air, 400, and taking the price of €6.25, we can assume she has €2,500 in prize bonds. Best trad bank deposit rate I can see is 2% with AIB which would produce €33.50 net interest. Our reporter is effectively spending €33.50 annually on lottery tickets from the government (you could make this figure higher by assuming a deposit with a neo bank or through raisin, or by comparing to a different type of investment). It's not going to break the bank, but people are fooling themselves if they think it's free.

 

[ClubMan]

First line of the article...

Some commentators claim that prize bonds are “not a suitable long-term investment” and offer a “poor” return to savers. I beg to disagree.

That's patently rubbish. And I say that as somebody who, as I mentioned earlier, has c. 1% of my overall net worth in Prize Bonds over a few years now...

 

[Duke of Marmalade]

Plucking a number out of the air, 400, and taking the price of €6.25, we can assume she has €2,500 in prize bonds. Best trad bank deposit rate I can see is 2% with AIB which would produce €33.50 net interest.

Interesting angle. The tax free pay out on PBs is 1% or €25 in this example. The pay out on Lotto tickets is 50% or €16.75 in this example. So PBs are quite a better proposition than Lotto tickets and nearly as much fun with the weekly draw. By contrast the UK draws are monthly and so not a good substitute for Lotto. I might even be tempted back in for that small punt.
But the general thrust of the article that they are a good investment is rubbish at today’s rate.

 

[TomEdison]

Interesting angle. The tax free pay out on PBs is 1% or €25 in this example. The pay out on Lotto tickets is 50% or €16.75 in this example.

No, I think you're overthinking this.

The woman has €2,500. She could deposit it with AIB and get a net return of €33.50 per year. Or she can put it into prize bonds and get an unpredictable return, depending on whether she wins a prize or not. In either case she can get her €2,500 back at any time, so she is not risking her capital.

If she puts her €2,500 into prize bonds, she's effectively sacrificing €33.50 per year for the entertainment value she derives from the chance of winning in the prize bond draw.

If she's willing to spend €33.50 per year on entertainment, she could put her €2,500 into AIB, take the interest, and spend it on lottery tickets.

So the choice she is making is, "which form of entertainment do I want to spend €33.50 on — prize bond draws or lotto draws?" The mazimum prize she can win in the prize bond draw is €500,000. The maximum prize she can win with lottery tickets is many times more than that. She might reckon she'd get more entertainment value playing the lotto, because of the larger prizes, than she would participating in the prize bond draw. The actual chance of winning a prize is greater with prize bonds than with lotto, but I suspect what people derive entertainment value from is not thinking about whether they will win a prize — looking into that in any detail is not entertaining at all — but in speculating about how winning a prize might affect them, or change their lives, or solve their problems..

But in neither case is the woman making an investment decision. She is choosing between two altenative ways of spending €33.50 on entertainment, so this is an expediture decision. It makes no sense to think of an investment return on the $33.50, because this is not an investment transaction.

 

[tinymouse]

There's actually very little entertainment value in Prize Bonds. I don't see why they don't do some kind of live draw like the lotto. And the prizes should be transferred to your bank account rather than invested in more prize bonds. So at least it feels like you've won something, even if it's 75 euro. At the moment, it feels like earning interest rather than actually winning anything.
500k top prize, too, seems a little quaint compared to the Euromillions. If you're going to have a miniscule chance of winning a top prize, it should be at least enough to buy you an average house in Dublin.

 

[ClubMan]

Plucking a number out of the air, 400, and taking the price of €6.25, we can assume she has €2,500 in prize bonds.

The tax free pay out on PBs is 1% or €25 in this example. The pay out on Lotto tickets is 50% or €16.75 in this example.

Where did you get €16.75 from?

 

[ClubMan]

I don't see why they don't do some kind of live draw like the lotto.

 

[Duke of Marmalade]

Where did you get €16.75 from?

2% of €2,500 less 33% DIRT.

 

[Duke of Marmalade]

No, I think you're overthinking this.

You've got me completely wrong but then @Fortune gave me a thumbs down so it must be my bad.
Make no mistake I prefer €33.50 in my back pocket to €25.
But from a purely actuarial perspective €33.50 Lotto tickets is worth €16.75 in prizes because of the 50% pay-out ratio whilst €25 (implied interest on Prize Bonds) is worth €25 as the pay-out ratio is 100%.
You raise the additional feature of the different nature of the two gambles. That is a purely behavioural issue and above my pay grade.
For avoidance of doubt and at risk of repeating myself, I think Prize Bonds are a rotten investment on today's rates.

 

[ClubMan]

Sorry, I still don't get it...

The pay out on Lotto tickets is 50% or €16.75 in this example.

2% of €2,500 less 33% DIRT.

But from a purely actuarial perspective €33.50 Lotto tickets is worth €16.75 in prizes because of the 50% pay-out ratio whilst €25 (implied interest on Prize Bonds) is worth €25 as the pay-out ratio is 100%.

 

[Mayo1969]

And the prizes should be transferred to your bank account rather than invested in more prize bonds.

To be fair, and I'm open to correction if I'm wrong, but I believe one has the option, when purchasing prize bonds, to have the winnings paid to you by cheque or paid into a nominated a/c, as opposed to reinvested in further prize bonds.

That said I've found the entire State Savings Agency set up regarding tracking and organising repayments/cash in's etc to be incredibly cumbersome and bureaucratic (and it's not possible to track children's or joint savings bond a/c's online)

 

[Duke of Marmalade]

Sorry, I still don't get it...

If you have me on some gotcha on the numbers please spell it out and I will correct the record but assuming you are in good faith I will attempt an explanation.
@Fortune put the journo's holding of PBs at €2,500.
This can be seen as €2,500 on current account and instead of interest you get a 1% of €2,500 i.e. €25 in a draw which pays out 100% and so has an "actuarial" value of €25.
Alternatively the €2,500 could be put on deposit with AIB earning 2% or €50 in gross interest. To align this alternative approach the interest received after DIRT €33.50 (€50 x 67%) could buy up Lotto tickets costing €33.75. But this time the "actuarial" value of your stake in the draw is only 50% of what you paid to get in i.e. €16.75. So from a purely actuarial perspective the PB portfolio is more valuable than a portfolio of AIB deposits and Lotto tickets.
In fact at the max joint holding of PBs, €500k, the annual interest is a fairly reliable 0.75% tax free plus 0.25% chasing the big prizes.

 

[Marsupial]

To be fair, and I'm open to correction if I'm wrong, but I believe one has the option, when purchasing prize bonds, to have the winnings paid to you by cheque or paid into a nominated a/c, as opposed to reinvested in further prize bonds.

Correct. All of the €75 prizes (a grand total of 6!) that I've won over the past few years have been automatically paid into my bank account.
In fact they were visible in my online banking on the afternoon of the draw - so I knew that I had won before the letter arrived on the following Monday!

 

[ClubMan]

If you have me on some gotcha on the numbers please spell it out and I will correct the record but assuming you are in good faith I will attempt an explanation.

No, it's not a trick question on my part. I simply don't understand. Even after your latest explanation. I don't understand the "actuarial" shenanigans. Doesn't really matter. I'm probably just thick.

 

[Corola]

The lotto rules say they pay out 50% of all the ticket money collected as prizes. So on average a person spending €33.50 on tickets could expect to win €16.75 back.

Except it's very skewed by the one large prize (jackpot) and lots of losing tickets.

 

[joe sod]

First line of the article...
"Some commentators claim that prize bonds are “not a suitable long-term investment” and offer a “poor” return to savers. I beg to disagree."

I read the full article there now, I detected a tone of reverse snobbery from it. Basically she is aligning herself with the majority of uninformed people who have prize bonds because they are a bit of fun not because of the returns. Also because they have been called "granny bonds" in the past because it was that demographic who were traditional owners and now she is a granny herself was the other angle.

I don't understand the loyalty to them myself, you are basically getting ripped off by the NTMA, but people are attached to them by their previous worthy legacy.

 

[Duke of Marmalade]

I'm probably just thick.

No you ain't thick. I just would never have made a good teacher.
Forget "actuarially" let's call it "statistically".
Below are my calculations on the Prize Bond Fund carried out in March.
The total PB fund was €4.45bn. NTMA pays out 1% of this annually. We see how that 1% splits into prizes. The "mopper up" are the €75 prizes so if one week to another the total fund differs from €4.45bn the difference of the 1% "interest" is in the amount of €75 prizes. Actually the residual dominates (0.77% in March) and large PB holders can regard the 0.77% as fairly reliable (say between .15% either side)
Now Prize Bond holders as a whole get 1% per annum interest, no more no less, but any particular PB holder's interest will be determined by the luck of the draw. So "statistically" speaking every PB earns 1% per annum (free of tax).

 

[Mayo1969]

I think I read in previous threads discussing prize bonds, that a big chunk of bonds were held by institutional investors, so that accordingly they were statistically more likely to benefit from a greater proportion of the prize fund and also had a better chance of the jackpot win.

Don't know whether this is actuarially/statistically the case or if they still hold this "safe investment with the prospect of big returns" attraction for institutions?

But it did impress on me at the time of the David v's Goliath scenario of the granny buying some bonds as a present v's the big institutional investors hoovering up the majority of the bonds issued and, accordingly, the majority of the prizes too (Like I've never encountered a real life individual investor who won big on the prize bonds, either in person or online or even in hearsay)

 

[ClubMan]

I think I read in previous threads discussing prize bonds, that a big chunk of bonds were held by institutional investors

Are you sure that you're not confusing Prize Bonds with Government Bonds? I doubt that institutional investors are hoovering up Prize Bonds. They're not that dumb.

 

[Duke of Marmalade]

There is a limit of €250k for holdings of PBs and I am not sure whether it is only individuals who can hold them. In any case institutions wouldn't touch them with a barge pole at 1% interest rate.