Are Prize Bonds worth a punt? They certainly were for several years when NTMA State Savings and Prize Bonds gave returns considerably higher than available rates of deposit interest. But since 2014, whether because the NTMA realised it was paying over the odds for funds, or because the banks complained that they were being undercut, there have been a series of rate cuts. On Prize Bonds this has been manifested in several revamps of the prize structure and cuts to the total payout.
Now, there are a couple ways of looking at Prize Bonds. Some people get a kick out of the idea that any Friday their boat could come in, and they don’t mind leaving small amounts of money tied up earning nothing. If that’s you then enjoy your harmless bit of fun. A lot of people have a very poor grasp of probabilities.
But there is a way to treat Prize Bonds as an investment. Although the returns occur at random, on a large enough holding they will provide a reasonably predictable stream of income. But you have to be prepared to invest at least several tens of thousands of euro. Think about it this way. The minimum prize is €50. You have to have 1,400 Prize Bonds costing €8,750 before you start to get one prize per year on average.
However, you have to understand that this is an average which you may not get every year. The probabilities tell us that you will get no prize about one year in every three, one prize in another year in three, two prizes in one year in every sixteen, and ever smaller probabilities for three or more in a year. You could very well go several years in a row with no prize. That is the nature of probability. If you have to cash in your bonds before your return has averaged out, you could end up with no return at all.
The returns get less “lumpy” the more Prize Bonds you hold. With €100k or more you can expect the return to quickly converge on the long term average of 0.58% tax free. For people who pay DIRT that is equivalent to a gross AER of almost exactly 1%. It won’t set the world on fire but it may be more than you’re getting at present. In any event, it’s worth understanding how Prize Bonds work in case good rates return in the future. There will always be an advantage to having a larger sum invested in terms of the smoothness of the return, even though everyone gets the same rate of return in the very long run.