Bonus Bonds

Question

I have just read your article on the bonus bonds. I have had about $70,000 of bonds for several years and have been getting virtually nothing from them. I thought with that much invested I would get more than a small prize or two. I never really thought about the ‘big one’ but maybe just some of the other ones would have been nice.

I now think I could have been doing a lot better for myself. The reasons why I had them was to keep my tax under the 33 cent level, I do not want to pay that high rate on all my income. With my super and other investments I earn about $30,000 per year which I really struggle to live on. Also I did think it was guaranteed by the Government.

Answer

You will note from my article that the chance of winning big is fairly remote. Your chances are better at getting hit by a bus, almost. Most prizes are obviously in the $25.00 to $27.00 range and that, every draw, is still very little when you have so much ‘invested’ [sic].

You do need to be ‘in to win’ as they say so leave a little and then get your funds doing something positive for you. Even Kiwibonds (Government Stock) will treat you to a reliable, regular income far better than bonus bonds with even better security if that’s your need.

I note that you comment on tax. I feel you are unaware on how income is treated. Tax is levied on your earnings as they rise. Up to $38,000 is taxed at 19.50% (actually 21.50% but there is a lower rate for the first $9,500). Any income above, this to the next threshold ($60,000), is taxed at 33 cents in the dollar. There is no retrospectivity therefore say you earned $40,000, instead of your current $30,000. Only the $2,000 (above $38,000) would be taxed at 33 cents alone, giving an average marginal rate of 20.18% on your total $40,000.

Also you comment on the Government guarantee. I did not make the point, but when bonus bonds were ‘owned’ by Postbank, Postbank was Government owned therefore some drew the view that there was a guarantee. I do not think that was actually the case, but by association – yes, maybe. The current security is high due to the nature of the investments – not by any ANZ guarantee. Get your money out and earn a decent return – I’m sure a reliable $5,500 per annum extra would come in handy!

Original Article published October 2006