GOOD RIDDANCE TO BONUS BONDS
Mark Lister, August 2020
If you’re a Bonus Bonds ‘investor’ – don’t be upset the long running scheme is being wound up. This is an opportunity to educate yourself about your investing options.
Bonus Bonds have been around since 1970, originally launched by the Government as part of the old Post Office. Postbank was then formed in the 1980s and sold to ANZ in 1990. Since that time, ANZ has continued to operate the Bonus Bonds scheme.
The last annual report (for the 2019 financial year) suggests there are almost $3.2 billion worth of Bonus Bonds on issue, reportedly held by more than a million New Zealanders.
In short, you buy a unit for a dollar, get no interest or return, but you do qualify for entry into the monthly prize draw.
The law of statistics suggests there will be a few people out there who’ve won the odd prize, including some that have even hit a big one. However, the vast bulk of holders will have done very poorly.
In 2019, the average chance of winning was one in 32,294, according to ANZ. Not exactly great odds.
That year, the total prizes awarded in aggregate represented a mere 1.34 per cent of the total assets of the scheme, so that’s essentially the interest rate that Bonus Bonds were earning for their collective holders.
Quite simply, that’s pitiful. The six-month term deposit rate over the same period was about two-and-a-half times higher at 3.3 per cent.
Other positive arguments over the years have been the fact that any winnings are tax free, and that it’s a fun investment.
Personally, I’d rather get a decent return and pay tax on it, instead of receiving close to zero and being allowed to keep all my next-to-nothing.
As for the fun part, there are better charities than an Australian bank if you’re looking for gratification.
So, what do you do if you’re one of the million people holding these Bonus Bonds?
Just about anything really.
If you’d purchased $1000 of Bonus Bonds in 1970, and won nothing over that period, you’d still have your $1000, although because of the impact of inflation, it would have the buying power of just $55 today.
In contrast, bank deposits have returned 5.2 per cent over that period (assuming a personal tax rate of 30 per cent), so your $1000 would’ve turned into a much healthier $12,746.
Having said that, the average inflation rate over that 50-year period has been 5.7 per cent, so you still would’ve seen some of your spending power eroded.
An example showing rates of return on $1,000 since 1970
If you can withstand a few ups and downs along the way and you’ve got a long-term investment timeframe, growth assets like shares and property come into the equation as options.
Since 1970, the New Zealand sharemarket has returned 9.5 per cent annually, while house prices haven’t been far behind at 9.0 per cent.
If you’d invested your $1000 in each of those fifty years ago, it would today be worth $99,930 and $74,489 respectively.
I’ve ignored any additional taxes on dividends (which would be minimal given the imputation tax credits that come with NZ shares) and assumed reinvestment along the way, but you get the picture.
Inflation and interest rates aren’t nearly as high as they have been in the past, so the current term deposit rate is closer to 1.3 per cent and the dividend yield on NZ shares is about 3.5 per cent, on average.
But still, your options are wide and varied, and virtually all of them will give you a better return for the risk than your Bonus Bonds did.