Prize bonds: The answer to low interest rates?

Irish savers are increasingly turning to prize bonds in an effort to earn a decent return on their funds, as deposit rates continue to plummet to new lows. However, falling interest rates means that the chances of winning are also shrinking.

Latest figures from the National Treasury Management Agency (NTMA) show that as of end-March 2017, some €3 billion has been invested in prize bonds, as savers hope that the chances of winning a prize will beat the record low rates of return on offer from deposits.

Deposit rates have continued to fall in recent months, with the best rate currently on offer just 0.51 per cent on an instant access account - and it’s offered by Nationwide UK, which is readying its departure from the Irish market. It means that a € 15,000 deposit will earn just €76.50 over the course of a year - or just € 46.66 once Dirt is deducted.

The unusual interest rate environment means that for many savers, prize bonds are one of the few ways of offering a risk free return on their money.

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In 2016, some € 670 million in saver’s money flowed into prize bonds, up by 17 per cent on the year prior, and the growth trend has continued, with about €100 million flowing into the product in the first three months of the year. It means that since 2011, more than € 1.5 billion has flooded into prize bonds.

Prize bonds can be purchased in units of € 6.25, and there is a minimum purchase of four units costing € 25 and a maximum purchase in any single transaction of € 250,000 (or € 500,000 for a couple).

The bonds entered into a weekly draw with prizes ranging from € 1 million in the last weekly draw in March, June, September and December and € 50,000 in all other weekly draws. Thousands of other cash prizes are also awarded each week. Prize Bond winnings are not subject to Dirt or other taxes, which means that even if someone puts € 15,000 into prize bonds and wins just € 50 a year, they will have done better than putting their money in the top paying deposit account.

However, returns offered by prize bonds are also declining, despite the growth in fund assets. The annual prize fund is determined as a percentage rate of the entire fund, but this also moves in line with general market interest rates, and currently stands at just 0.85 per cent, down from 1.25 per cent in March of last year. This means that as of December 2016, the prize fund stood at about € 28 million, paid out in 392,176 prizes, down from € 30 million in prizes paid out in 389,033 individual prizes in 2015. In 2012, some € 46 million was paid out in 438,682 prizes.