Mary Holm

Mary Holm is a personal finance columnist for the NZ Herald.

Bonus bond returns

By MARY HOLM

Q: In your reply to a question on March 30, you said " ... forget the bonus bonds. Unless you win a prize, you make a zero return."

Ten out of ten for stating that bonus bonds are not a good investment. Zero out of 10 for the mathematics.

Statistically, if one has about $1000 in bonus bonds, it can be expected that one would get an average of one draw a year, most likely $20.

With the tax-free status of the "prize", the return is therefore about 2.5 per cent.

Not much, but not zero, and there is a remote chance of a bigger prize. That's a far better gamble than Lotto or the pokies.

At least you get your stake back!

And I would give you zero out of ten for English!

I said "unless you win a prize". If you don't, your return is indeed zero.

At first I questioned your maths, too. A return of $20 on $1000 is 2 per cent.

But I presume you're saying that's equivalent to a taxable return of 2.5 per cent, which is true for those in the bottom tax bracket.

It ranges up to 3.3 per cent for those in the top bracket.

More important, though, your numbers are different from those given out by the Bonus Bond Centre. They say the average return is 3.4 per cent.

The difference is probably because they take into account prizes bigger than $20.

One lucky person gets $300,000 a month, another $100,000 and another $50,000. There's also a range of smaller prizes.

But I quite like the way you've calculated it. You've assumed that an investor won't ever get one of the big prizes - which will be true for the vast majority - but that they will pick up $20 now and then.

Your estimation of $20 a year, on average, for someone with $1000 in bonus bonds looks about right, given the probability figures the centre gave me.

In the end, then, I take your point. A long-term investor in bonus bonds almost certainly won't have a zero return, because the small prizes are pretty common.

Still, unless the investor is really lucky, the return will probably be considerably lower than on term deposits.

As I've said before, having a bit in bonus bonds is fine if you regard it as fun.

But it is not the place for major savings.

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