Re: Key Post: Prize Bonds as a place to keep some money
Prize Bonds
The company was set up in 1989 to operate the scheme for the Minister for Finance. The scheme is now operated on behalf of the National Treasury Management Agency (NTMA) which manages the national debt on behalf of the Minister for Finance. In 1999 the company submitted a successful tender to operate the scheme for a further 10 years until September 2009.
An Post is responsible for the accounting, marketing and the conduct of the draw. The administration is carried out by FEXCO in Killorglin, Co.Kerry.
Prize Bonds are a flexible, secure, state guaranteed investment. The top prize in the monthly Jackpot prize draw is €1,000,000 or €500,000. A €1,000,000 Jackpot prize will be awarded in three draws throughout the year, with the fourth awarded in the draw held on the last Friday before Christmas. A top prize of €500,000 is awarded in the other eight monthly Jackpot prize draws. A top weekly Star prize of €20,000 is awarded each week, other than when the monthly jackpot prize is awarded. With a minimum purchase of €25, that's a huge return on your investment.
Draws are held every Friday with over 2,500 prizes ranging between €75 and €20,000. Every eligible €6.25 Prize Bond is automatically entered in the weekly draw no matter how old.
The more Prize Bonds you hold the greater the possibility of you getting a substantial return on your money.
The Prize Bond Company Ltd. is a joint venture operated between An Post and FEXCO.
The number of prizes awarded each week depends on the total size of the Prize Bond fund. It is currently calculated at a variable rate of 3% of the fund size per annum. This provides over 2,500 prizes every week.
Tax-free
All winnings are tax-free. In Ireland winnings are not liable to Income Tax, Capital Gains Tax, or D.I.R.T. (Deposit Interest Retention Tax).
Prize Bond holdings at 31 December, 2007
Number of separate Prize Bond holdings 5.43 million
Fund value €631.1 million
Source: The Prize Bond Company Limited Annual Report 2007
Analysis
The capital is very safe. You don’t risk the money you put in, only what interest you’ll get, and Prize Bonds are operated by An Post which is backed by the State.
What are the odds of winning :
The odds of any single bond winning the top prize are about 1 in 5.4 million (the number of bonds in circulation)
However the minimum investment is €25.
Furthermore, the draw for €1m only takes place 4 times a year.
The other 8 months, the prize is €500,000
In comparison the odds of winning the UK Premium bonds are 18 billion to 1.
You’re likely to win even less than the interest rate.
The value of prizes paid out is determined by an interest rate, which is currently 3%. This means if you owned every Prize bond in existence, the amount won over a year would be equal to 3% of what you put in.
So very roughly, on average for every €100 put into Prize Bonds, you'd expect a €3 annual return.
Yet because of the way the prizes are allocated, the majority of people will win much less than the interest rate anyway.
Don’t think of it as ‘winning’
The great attraction is ‘the lottery effect,' the chance of winning a dream, and there is of course the chance of winning a million. Equally you could be the next space-walking astronaut, and you’re odds probably aren’t that dissimilar!
The fact the payouts are commonly referred to as a ‘win’ rather than an ‘interest payment’ is psychologically devious. Comments like, “my friend wins €75 every few months” mislead; on clinical evaluation, someone with €10,000 of Bonds should ‘win’ €300 a year; that’s roughly €25 every month; yet the same cash in a savings account could ‘win’ over €41 every month or €500 a year.
Worse still, compare the Prize Bond interest to the current rate of inflation, which is almost certainly higher than the Prize Bond interest rate, so any cash you have in bonds is increasing more slowly than the prices of everyday goods. This means by holding bonds the real amount of money you have is decreasing.
Are they ever worth it?
Look at Prize Bonds with a clinical financial eye. Some will win more than the average, not many, but a few. And if you're that lucky person, this is a great return. Yet the odds of winning big get very long.
Prize Bonds aren’t as good as they first appear
It's all about the actual prize distribution. The following is the prize structure:
Monthly Jackpot Prize
4 x €1,000,000
A €1,000,000 Jackpot prize will be awarded in three selected monthly Jackpot prize draws throughout the year, with the fourth awarded in the draw held on the last Friday before Christmas.
8 x €500,000
The €500,000 Jackpot prizes will be awarded in the monthly prize draws held on the first Friday of the other eight months.
Weekly star prize €20,000 is awarded each week, other than when the monthly Jackpot prize is awarded.
5 prizes @ €1,000
10 prizes @ €250
Over 2,500 @ €75
Why most people win less than the interest rate
Even though Prize Bond rates stack up poorly compared to decent savings rates, even that’s still misleadingly generous; the real expected payout is much less, as it's massively skewed by the distribution of the prizes.
This is tricky to understand, so let me start with a simple example. Suppose there a contest offered a €1,000,000 prize and allowed a million people to buy a ticket costing €1. It could then be argued the average winnings per ticket were €1, even though 999,999 people would win nothing.
A similar, though less drastic, effect is happening with the Prize Bond interest rate; it says the payout is 3%, so you'd expect to win €3 per €100. Yet of course this is impossible, there isn't a €3 prize; you can either win nothing, €75, or more than €75. The big jackpot prizes, won by a miniscule number of people, skew the payout average and make the interest rate look much more generous than it is.
The situation that this throws isn’t a pleasant concept for Prize bond holders expecting an average of 3%pa.
On the surface Prize Bonds don’t look to be too complex. The winners are happily listed on the website with enough data to allow anyone with a calculator to work out the chances of any one bond winning a single prize over a month.
Yet to work out the chance of someone with a larger holding say five thousand bonds winning more includes countless variables. To win €1000 in one go could be one €1000 prize, or four €250 prizes, or a combination of smaller prizes; yet to win more than €500 holds scores of variables.
Plus of course, the draws are monthly but the €1,000,000 prize is only every quarter, so if you’re calculating the assumed winnings over 5 years; it actually means you’re calculating the interaction of probabilities for over 60 draws to get the various answers.
To calculate the probability of winning is virtually impenetrable. You would need to use a very advanced multinomial probability equation.
