The pros and cons of investing in Prize Bonds - Limerick financial planner

Question
Liam, we have all of our savings, which is €100,000 invested in Prize Bonds and we were wondering whether they are a good investment. We typically win about €75 each month which we’re happy with so just wanted to check in and see what you thought?

Answer
The first Prize Bond draw was made back in March 1957. And they came into existence under the then finance minister, Mr Gerard Sweetman, who provided for Prize Bonds in the Finance (Miscellaneous Provisions) Act of 1956.
And they have progressed quite a bit since then where each week there will 8,812 winners each week where one person will win €50,000, 20 will win €1,000, another 20 will win €500, and there will be 8,771 winners of €75. And then of course there is a monthly jackpot where one lucky winner will receive €500,000.
If you’re winning €75 each month, over 12 months that’s €900 so the net return on your investment is just 0.90%, which is poor on that amount of money. 

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If someone had €10,000 worth of Prize Bonds and they received the same €900 each year, then their return is 9% and that’s a great return, so its really down to how lucky or unlucky you are and how much you have invested in Prize Bonds.
The unit cost of a prize bond is €6.25, and I think there is about €4.65 billion of them in existence which means there are about 744 million different bonds in existence so your chances of winning for example the €500,000 monthly jackpot are 744 million to one.
And the odds obviously aren’t great but that’s not to say you shouldn’t stay invested in them either, because who knows your number could come out next week, but I personally wouldn’t have all my money invested in them or in any other one investment for that matter. 
And whilst Prize Bonds are 100% capital guaranteed and are fully redeemable at face value of the amount you originally bought them at (after an initial period of three months) the only risk to your capital is an inflationary one.
Which is why you need to diversify your investments because you need to currently be earning a minimum of 1.8% net after tax for your money just to hold its value, so whilst you might think you’re earning €900 ever year, I’d see it differently because I believe you’re losing €900 each year because you need your €100,000 to be making €1,800 each year just to maintain its value and keep up with the pace of inflation.
So, my advice is to keep investing in Prize Bonds, but perhaps look at other investments as well where the capital is 100% guaranteed and you have immediate access to your funds, and do they exist? Not quite but they aren’t far off the 1.80% target you need to be hitting either.
For example, if you were to look at the website www.raisin.ie they have access to banks throughout Europe where one of them is offering 3.10% (AER) gross for funds where you have immediate access to funds. And when you apply DIRT at 33% to this rate, you’ll get 2.08% (AER).

Question
Liam. We’re a couple who might buy or build a property hopefully next year but we’re just not sure what we’ll do but we want to get our costs in order in either scenario and one of those costs we were told to factor in was stamp duty. We’re hearing different things about this cost and we’re not sure what it might be if anything at all. Can you help clear this up for us please?

Answer
Okay if you decide to buy a property, stamp duty is charged at a 1% rate on amounts up to €1,000,000. 
So, if you buy a property i.e. a house, duplex or an apartment and its costing €450,000 you will end up paying €4,500 in stamp duty.
And I should have said this first, but stamp duty is charged on the written documents (called deeds of transfer and/or deeds of conveyancing) that transfer ownership of land and buildings.
If you buy a property and the cost is between €1,000,000 and €1,500,000 then stamp duty is charged at 2% and if greater than €1,500,000 the rate becomes 6%.

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So, if you purchase a house for €1,800,000, the total stamp duty is €38,000 i.e. €10,000 on the first €1 million which is at a rate of 1%, €10,000 on the next €500,000 at a rate of 2% and €18,000 on the remaining €300,000 at the 6% rate.
If you are building a property or buying a newly constructed property, the same % rates apply but you will end up paying less because if you paid VAT on the new build, you’re only liable to pay stamp duty on the base price excluding VAT.
So, let’s assume you buy a new build for €500,000 and this cost was inclusive of VAT at 13.5%, to figure out your stamp duty cost you subtract the VAT amount i.e. €67,500 from the total cost of €500,000 which means your 1% stamp duty is charged on €432,500 and you end up paying €4,325. 
There are some exemptions where stamp duty isn’t chargeable with the two most notable ones being (a) if you buy a property under the local authority tenant purchase scheme you only have to pay a maximum amount of €100 in stamp duty and (b) there is no stamp duty payable in certain circumstances when the transfer of a property is between spouses and partners.

Question
Liam. I’ve been approached by a company who’ve made an offer to me to join them and I’m not sure from a financial perspective what the difference would mean to me. I’m single and my current annual gross salary is €80,000 and the new offer is €110,000. My current employer is paying 7% of my salary and so am I. The potential new employer will contribute 13% if I contribute 7%. I’m not sure if this has any bearing but I’m two years into a 30-year mortgage where I initially borrowed €315,000 at a variable rate of 4.10% and I’m 37 years of age. 

Answer
There are three things we have to look at here for you and the first is going to be what the net after tax difference between both salaries will be each month.
And based on your current salary and pension contributions I estimate your net take home pay is about €4,300.
Based on your new salary and factoring in your 7% pension contribution as well, I believe your net monthly pay will be €5,400.
So, if you accepted the new offer you can expect to see €1,100 more lodged into your account each month. 
Now let’s look at your future self.
Between you and your current employer there is €934 being lodged into your pension account every month. And €467 is coming from you and €467 from your employer. 
If you joined the new company, there would be €1,833 lodged where €642 is coming from you and €1,191 from them.
If that differential remained the same and we projected forward 28 years when you are 65, you’d find the following:

Fund Value           Tax Free Cash                 Annual Income 
Current Employer €576,562       €144,141                €17,297
New Employer       €1,132,53        €266,506              €33,976

The difference under each heading is significant and the above numbers were calculated using a 4% annual return and a withdrawal rate from your fund after taking tax free cash of 4%.
And just to point out that you’ll end up personally paying about €35,280 more in total over 28 years after tax with your new employer than your current one because your contributing 7% to a higher amount i.e. €110,000 than €80,000 but I think that’s more than acceptable when you compare the end numbers above and when you see how much more your possible new employer is paying (€1,191 each month) and your current one (€467). 
Now I want to look at what you could do with some of that extra money you’d be in receipt of each month and what impact it could make if you did move. 
And if you used let’s say €350 of it as an overpayment (that would still leave you with about €750 more each month than you have now) on your mortgage, this is what would happen:

-You would reduce the term by eight years and one month
-You would save €67,531 in interest payments
-You would be aged 57 when you’d become mortgage free rather than 65 
-By reducing the term eight years earlier, your effective interest rate becomes 2.70% rather than 4.1%
The difference in salary from what you are being offered compared to what you are currently earning is significant. And that’s because the jump is about 38% which is very high but it’s what that means and could mean from a financial perspective is important and I hope what I’ve outlined is useful. 
But money shouldn’t be the overriding factor when making a big decision like this, but without doubt it’s an important one, nonetheless. You’ve also got to like your new employer and what they stand for, what their values are, what their culture is, what additional benefits they have to offer, what career trajectory they have planned for you and so on, but I hope the areas I’ve covered and the numbers I’ve revealed help with your decision making.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie