The odds of winning a tax-free prize have fallen in recent years, as market interest rates have dropped. Photo / File
COMMENT:
Q: I maintain a balance in Bonus Bonds of about $32,000. Noting recent press articles critical of Bonus Bonds' fees and odds of winning, why would I do that?
On average, I win the minimum prize each month of $20, producing $240 in tax-free income each year. That equates to an after-tax return of about 0.75 per cent.
There is also the remote possibility of a big tax-free win (up to $1 million), albeit at a probability for the largest prize of about 1 in 3 billion each monthly draw for each dollar invested.
The money is also effectively on call.
Do you know of any other on-call bank account that pays anything after-tax even close to 0.75 per cent, without other conditions?
The ANZ Bank Select savings account is only paying 0.05 per cent, with a requirement to maintain a minimum balance of $5000. Even the 60-day term deposit rate at ANZ is only 1 per cent pre-tax.
Some note that Lotto odds are better, but forget that you don't get your capital back. On my calculations, one would be spending on average in excess of $350 to win the Division 6 prize of about $25. I don't buy Lotto.
Perhaps there is some logic to the $3 billion-plus invested in Bonus Bonds after all.
The capital value of Bonus Bonds also remains steady, as changes in interest rates are reflected in the variability of the odds of winning a prize. This contrasts with traditional fixed-interest managed funds, where the value of the units varies day to day depending on the movement of interest rates.
PS (written later): For the record, it is still working, with me winning another $20 this month.
A: It goes against the grain to say much positive about Bonus Bonds, except that they come with the hope of winning a big prize, which is a bit of fun.
Until fairly recently, the management fee, at 1.15 per cent, was a ripoff. ANZ — which runs Bonus Bonds — reduced the fee in July to 0.87 per cent, but that's still pretty high for a fund that invests mainly in cash, bank deposits and government securities.
And the odds of winning a tax-free prize have deteriorated in recent years, as market interest rates have fallen. In 2015, each month you had about a one in 17,400 chance that each dollar you invested would win something. Now it's only one in 32,300.
To add to the Bonus Bonds blues, the value of your investment is likely to go backwards, because of inflation, given that you earn no interest — unless you get more than your fair share of prizes and reinvest that money.
Then along comes you, pointing out that if you have a fairly large amount in Bonus Bonds, and regard your investment as an on-call account, the music is actually pretty sweet.
True, the returns are sporadic. You win "on average" $20 a month, which means some months you get nothing. And for someone with a lower balance, there will be many prize-less months. Indeed, if you had, say, $1000 in Bonus Bonds, you might go a long time without any wins — although you also might win more than your fair share.
The message seems to be that a Bonus Bonds account might work well for you if either:
• You want to keep a large amount — say $30,000 or more — on call.
• You want to keep a smaller amount on call and don't mind an uneven return. It should still average about 0.75 per cent over a long period, and more if you have a big win.
Q: We have been in the habit of giving our soon-to-be-seven granddaughter $100 or so of Bonus Bonds for her birthday. She has no need of any more clothes or toys.
However, the recent publicity over the poor performance of these bonds has made us wonder if we are wasting our money, and if there is some other way we can contribute to her future without a deposit becoming lost in her bank account. Any suggestions?
A: As noted above, Bonus Bonds can work well as an on-call bank account. But you're looking for a longer-term investment. If the money can be tied up for 10 years or more, you should be able to get considerably more, on average, than 0.75 per cent.
One idea is to encourage the girl's parents to open a KiwiSaver account for her, and you can deposit into that. The money could eventually help her into her first home — and she won't be able to blow it on silly stuff in the meantime. If she gets a part-time job as a teen, some of her pay will also go into it.
Or, if you prefer the money to be available for, say, tertiary education or international travel or starting a business, you could use a similar non-KiwiSaver fund.
Either way, use Sorted's KiwiSaver Fund Finder to select a suitable fund. The "Find the right type of fund for you" tool will help you and the girl's parents select a risk level for the fund.
Then choose a provider. I suggest going for one with low fees. If you want to stay out of KiwiSaver, the provider will probably have a similar but more accessible non-KiwiSaver fund.
PS: One more suggestion. Your deposits probably don't mean much to the little girl now — although she'll be grateful later. So how about also giving her a book appropriate for her age?
If you look at children's book-award winners, or ask a knowledgeable bookseller, I'm sure you'll find some treasures that could become much loved.
Q: I have followed your NZ Super debate with interest. I did a thesis on welfare changes from the Mother of All Budgets back in 1991. Nothing's changed since, broadly speaking.
People who think that universal super is unfair (so let's means test) forget that 30-35 per cent of the country's welfare bill goes in administration. These are vastly complex payment systems, and thousands are employed to make them run smoothly.
Adding means testing to super might make it fairer, but it would save no money — in fact, it would probably add to the bill. It's easier, simpler and cleaner as it is now.
A: Thanks for some important facts, which put the kibosh on one of the arguments for means testing — that it would free up money for other purposes.
Q: There is already a means test in this country. It is the community card. For example, when the Government decided all houses had to insulated, of three houses side by side, all occupied by retired couples, those each side of mine were insulated free. It cost me $3000.
In our town you can get a rates rebate or your lawns cut. We pay for ours. But the biggie is if you have to go into care. If you have a card, no problem, you get everything paid.
I am in my early nineties and my wife her late eighties. If we had to go into care, we would be looking at over $2000 a week, and you cannot hide your money in a trust. They dig into everything. I could write a lot more but it would make this letter too long.
A: I'm not sure all your details are quite right, but the point is that the government provides some extra help for poorer retirees. And long may that last.
More letters on NZ Super next week.
Q: We make substantial donations to charities. As one of your correspondents commented, once they realise you are sympathetic they send repeated requests.
We have found that a polite letter stating that this is an annual donation and that we do not want any further requests, surveys (which always include a hint that we should remember them in our wills) or updates is almost always complied with.
We have never had to make the explicit threat to withdraw our support.
People should beware of putting these things in their wills. I had a relation who made such a bequest but by the time he died it took such a large portion of what he left that his wife faced severe financial difficulties.
A: Your last point is particularly important. If you put a large donation in your will, the amount should be monitored over the years. Or perhaps leave, say, 5 per cent of your estate to a charity, rather than a dollar amount.
Q: I've worked in the charitable sector for more than 25 years. In response to some of the letters in your column:
Thank you to the original couple for their financial support of so many charities. Without the donations, many worthy organisations wouldn't be able to do their great work.
No charity wishes to contact anyone who doesn't wish to hear from them. So just tell them how often you wish to be contacted and how.
In regards to how the family should contact the charities once their parents have passed away — at the bottom of each email should be an "unsubscribe" option — just click on that.
Those who make contact via mail can either write "deceased" on the envelope and send it back in the mail or open up the envelope, make a note on the response coupon inside and return it to the charity via the freepost envelope. The charity should then update its records accordingly.
A: Thanks for some good tips. But it seems not every charity responds to requests. Read on.
Q: We support quite a large list of causes. And in keeping with James Dilworth's maxim, that "the only wealth you will ever possess is that which you give away", we have enjoyed our attempt at philanthropy.
However, we don't have a bottomless pot of gold. Despite sending a letter with every cheque in which we ask for no mailouts or reminders, there is an irritating lack of attention to detail on the part of whoever opens our envelope, and we keep getting mail we don't want.
Because we are trying to be helpful, we don't want to remove the offenders from our list. So we usually respond to unwanted mail by sending their latest tear-jerker back to their CEO with a copy of our last letter, in the hope for some trickle-down information sharing.
Hope sharing our experience helps.
A: Great idea. It's often best to go to the top — even though it shouldn't be necessary.
Q: A couple of weeks ago you said that you told a woman from a charity that if she kept ringing you would stop donating, but if she left you alone you would keep giving.
The woman was probably working on commission. Those callers don't have any incentive to leave you alone, even if it doesn't work out well for the charity in the long run. I think charities should be more aware of that.
We won't donate to charities that hire telemarketers or people to harass you at the mall. And we stop donating to those that send us endless letters. We want our donations to go where they're needed.
A: Let's acknowledge that most charities simply want more money so they can do more good. But, as you point out, sometimes they try too hard and it backfires.
I've still got several helpful letters about charitable donations to run in the next two or three weeks. So no more on that topic, thanks.
- Mary Holm is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.
This recovery is making us sweat, but that might be a good thing in the long run.