Chapter 1: What is the main topic discussed in this episode?
The Clare Byrne Show on Newstalk. With Aviva Insurance. People in Ireland spent €365 million buying prize bonds last year. It is a fall from the year before, but it's still a huge sum of money. So we wanted to find out if they are worth the investment. And Leah McMahon is here now, Senior Financial Planner with Fairstone. You're very welcome, Leah. Good to have you back with us.
So, first of all, tell us maybe what prize bonds are for the uninitiated.
Okay, so a prize bond is basically a state savings product that is 100% guaranteed by the state. So they are 100% committed to paying you back the capital that you invest. So typically what it's used for then, it's used by the exchequer to fund government expenditure. So I suppose it's kind of a way of...
You know, getting people to put, I suppose, invest in the state in the sense, but, you know, if you want to in cash, you know, after the minimum 90 day holding period, you can take out your savings again.
You'll get it back, but you won't get much more than what you put in.
No. So I suppose the incentive is, is that there is, you know, a weekly draw. So it's decreased. Like there was times where like that you could win up to a million euro, whereas it's now, I suppose, the main prize is the 500,000. So there's weekly draws and I think it's 500,000. There's a 50,000 draw. and then typically kind of 75 euro.
So that's, I suppose, that's the incentive for purchasing prize bonds that you may be in a chance of winning. It's kind of like a lottery where you can nearly reclaim the money that you spent on the ticket at any point. So I suppose outside of that, then there is a 1% interest variable rate on it, but the 1% is used to fund the prizes. So it's not that you get a 1% interest rate on it.
So effectively, if you don't win a prize, you get 0%.
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Chapter 2: What are prize bonds and how do they work?
So you're staying flat if you don't win anything.
Exactly. And is it individuals who can buy them or can company entities buy them as well?
Typically, it's an individual basis. It's very popular, I suppose, with... maybe previous generations, like they would have been really common christening gifts. I know my daughter got one for her christening eight years ago, communion gifts, kind of. They're a very, maybe a grandparent style gift, I suppose, because they have been around so long.
But I think nowadays, I suppose the newest kind of generation kind of and the generation before that, they're more active investors. So it is, I suppose, previous older generations that we typically would see. Like there's, I think there's about 700 million invested in prize bonds, or prize bonds out there. But the total fund of the prize bond value is 4.5 billion.
So we actually have a lot of money in prize. We have a lot of money at 0%.
And I wonder how much of it is sitting there and will never be claimed back.
I would take a fair stab at saying, you know, probably, you know, a good... What odds do you have of winning anything? So the organisers say you have a one in five chance of winning because there is weekly draws. So, you know, if you think about it, there's 52 weeks in the year.
Like people tend, and that's the thing, they're a very, I suppose in my eyes, they're a very short term product because, you know, anything, you know, less, I suppose less than five years is... is I suppose you look at options for short term deposit style or saving, whereas anything over the five years, it is an investment that you need to look at in terms of keeping up with inflation.
So when it comes to, I suppose, like what style, where you're going with this, you know, you have to really look at your goals for, I suppose, the savings. Why are you purchasing prize funds? What's the plan with the money? Why are you holding money on it?
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Chapter 3: What are the potential returns on prize bonds?
And that's ignoring the fact that you might get 25% tax-free or you might get one and a half times your tax-free salary.
Yeah, I have a listener here who says, I'm in my 60s and my mother bought several prize bonds for me and my siblings and our children over the years. She's no longer with us. No one has any evidence of these prize bonds anymore. And she's wondering, can we track them down now and cash them in? I suppose you'd have to get in touch with the prize bonds organisation.
There isn't a huge amount of money involved. Could be a few hundred, all told, over 50 odd years. And this listener won 25 euro once many years ago.
And this is the reality of it. So like if you take, you know, if you take the example of like you have 10,000 euro and someone says to you, why don't you put it in prize bonds? You know, you could win something you're thinking. So I think part of it is the thrill of getting the letter. And I actually do remember a letter coming in the door from my grandfather years ago.
And when I say his hands were shaking and when he opened the letter, it was 75 euro. You know, and he, you know, he was expecting the big one. But like if you're thinking, if you've 10,000 euro, for example, and you're looking at, do I put it in prize funds? Because I suppose the, I suppose the kind of the security in it is that, you know, it's capital guaranteed.
You know, the government has to pay it back. So you know that you're at no risk for that 10 grand. But that 10 grand, like it's a capital guarantee doesn't eliminate risk. And like what I mean is in the sense of inflation, like inflation over the long term is two and a half percent.
So if you put that 10 grand in a prize bond for five years, you know, in five years time, you know, maybe you haven't won anything. Maybe you haven't gotten the letter in the door and you take out that 10 grand. You won't see that you've actually lost 1,160 euro because the actual true value of that 10 grand is just over 8,000.
we've a listener in me Leah who uses them as my weekly lotto I've put some savings into them if I win great if I don't at least I get my money back if I buy lottery tickets I get nothing back unless I win and this listener has been very lucky with a number of small wins over the years And that's fine, isn't it? If that works for you in that way and you're happy.
It's due no harm. And like that, it's I think the danger is because I've seen it in the past, like I've seen clients that have 200,000 in prize bonds. And, you know, like that, if it's something part of the weekly, you know, like I was, you know, if it's buying a lot of ticket versus prize bonds, then yes, I would say absolutely. You can get your money back. It makes total sense.
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Chapter 4: Who typically invests in prize bonds?
Like it's hard earned, you pay tax, get the money into your hand. And then effectively, you're telling the government, you can have this, you can use it as you wish, and I'll accept nothing in return. All right, Leah, thanks very much for explaining it all to us.
That's Leah McMahon, who's Senior Financial Planner with Castle Capital. The Clare Byrne Show. With Aviva Insurance. Weekday mornings at 9. On Newstalk. Conversation that counts.