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Bonus Bonds - are you feeling lucky???

31 March 2017

Every month one bonus bond holder will win $1,000,000 tax free. Even second and third prize sound enticing at $100,000 and $50,000 respectively. But how do the odds stack up?

Bonus Bonds was established in 1970 by the government to try and encourage New Zealanders to save. With a minimum investment of $20 it has been very popular with many fancying their chances of winning “the big one”. It is estimated that one third of all New Zealanders own bonus bonds. The scheme has grown over time and at the end of March 2016 over $3.1 billion was invested in bonus bonds.

Bonus Bonds v Lotto Financial Advice Hawkes Bay | credit dylan nolte

So, given its popularity does Bonus Bonds make a good investment? 

The money is invested in relatively conservative assets such as cash and fixed interest products, the aim being to produce positive income which is then pooled to create the prize pool. The chance of winning any prize in the 2016 tax year was 1 in 19,731 and over time is expected to range between 1 in 20,000 and 1 in 35,000. To put that in perspective it is estimated that the chance of winning third division lotto in NZ is 1 in 19,386 (but obviously with lotto you don't get to keep your money). The governing document of the scheme requires that the chances of winning are never better than 1 in 9,600.

What are the returns like?

Looking at the total prizes awarded as a percentage of the scheme's assets in the 2016 tax year the pay-out was just 1.69%.  Through the same period a simple term deposit would have achieved nearly double the return, and the average conservative KiwiSaver fund returned 4.1%.  Unfortunately, there are many New Zealanders that rely on bonus bonds as a means of saving for their retirement. The reality can be startling.

Even if over time you manage to achieve the average pay-out from the scheme, you will struggle to keep up with inflation meaning your purchasing power is slowly going backwards.

So, where did the rest of the returns go?

The scheme is required to maintain sufficient liquidity to enable people to easily redeem their bonds, so some funds would be held aside for that. The scheme also charges 1.28% of the net asset value (or approximately $40.1mil in 2016) to manage and administer the scheme.

Times have changed! In the 1970’s the range of investments available to retail investors was limited largely to property and bank deposits. However retail investors have far more choice today with easy access to local and global markets across all major assets classes. At the end of the day there is nothing wrong with holding some bonus bonds and having a flutter – you never know, you could be one of the lucky ones - and while the odds are similar it's a massively safer bet than lotto. Having said that, if you're holding a large amount of money in bonus bonds you may want to reconsider.

Don’t leave your retirement income to chance.

Sound investment principles such as regular savings, compounded returns, diversification, quality research and professional advice are far more likely to help you achieve your retirement goals.

Would you like to reconsider your investment strategy?

Whether it be to debate the use of Bonus Bonds or to talk about your wider wealth generation goals, it's a great idea to get professional investment advice to do the right thing by your nest egg.

We welcome your questions and enquiries if you'd like to chat about this. If you’re not currently a client or don’t have a detailed investment strategy in place, let's get a feel for how we could help you generate and grow your wealth.

We work on a confidential, no-obligation basis and your first meeting is completely free of charge, so we can weigh up your options first. 

Drop us an email or phone 06 870 7050 - we look forward to hearing from you.

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You might also be interested in these articles: 

> How much deposit do I need to buy a house?

What is a financial plan? (and how it can help you achieve things!)


KiwiSaver data Source: sorted.org.nz 29/03/2017

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