Powerball vs. the UK Lottery

I heard this morning about a record Powerball jackpot of $500 million, which is the fourth largest jackpot ever posted by the American lottery game. So tonight, across the 44 states plus the District of Columbia, Puerto Rico, and the US Virgin Islands, people will be waiting in lines to try their luck at becoming an overnight multi-millionaire.

This in itself is not that amazing, and it happens on a fairly regular basis -- not to me, of course, but  big jackpots in the US are not uncommon. The largest Poweball jackpot was just over $590 million, which was won by a single ticket holder, in 2013. 

The amazing part is that the Britain is also having a record setting lottery draw tonight. While the National Lottery's record "Lotto" jackpot is much smaller at £50.4 million, or about $74 million, it does have a lot of benefits over America's Powerball.



To correctly guess the odds of Britain's Lotto, you have to get all six numbers right, which puts the odds at around 1 in 45 million. 

There is also a caveat that if the Lotto jackpot is over £50 million, someone with only five correct numbers can win if there are no winners with six numbers. This basically guarantees a winner as the odds of getting five numbers are 1 in 144,414. 

In the US, the odds of winning the Powerball are about 1 in 292 million.



The British Lotto doesn't tax lottery winnings. Instead, the taxes are paid when you buy a ticket. This means that the winner, if there's only one, will claim the entire £50.4 million jackpot.

In the US, lottery winnings are subject to Federal income tax, which will take 39.6% of the lottery winnings. Additionally, many states have additional taxes and withholding, but for this thought experiment, let's disregard this. If you're very curious, or just very worried that you'll actually with the Powerball tonight and need to figure out your tax situation, you can consult some lottery tax guidelines.

Lastly, the US Powerball lets winners choose to collect their winnings a portion at a time, spaced out over many years, similar to an annuity, or to receive everything at once in a 'lump-sum.'

The first option is enticing because it would provide several hundred thousand dollars, if not millions, in income for the next several decades, which could also result in a lower tax bill and would also allow you to fully collect the entire jackpot. Except that's a bit misleading because while you'll collect the full dollar amount of the jackpot over the years, the purchasing power will have declined significantly by the time you collect everything. You also run the risk that something catastrophic happens and your money doesn't exist or simply isn't paid to you down the road. 

This is why most people choose the second option, which is the 'lump-sum' amount, also referred to as the 'cash value' of the jackpot. You get all of the money up front and you can then do whatever you want with it. However, the catch is that because you aren't allowing the lottery to self-finance the jackpot, you will receive a smaller amount than the jackpot in exchange for having it all now.



So in Britain, if you won, you'd receive £50.4 million, or about $74 million.

In the US, if you won, you'd start out with a jackpot of $500 million, which would then be reduced to $306 million when you chose the 'lump-sum' option. This $306 would be subject to the US Federal Income Tax Rate of 39.6%, which would lower the payout to $189.72 million.

While winning either of these lotteries would be great, assuming there's only one winner, the British Lotto comes out ahead:

  1. With odds of 1 in 45 million to win $74 million, each entry is worth $1.64.
  2. With odds of 1 in 292 million to win $189.72 million, each entry is worth $0.65.

Even with the current exchange rate of $1.46 per £1, the expected return on the British Lotto is positive; with the big assumption being that there is only one winner.

Yet, the odds of 1 in 45 million or 1 in 292 million do roughly correspond to the population numbers of both countries so it's at least reasonable to say that each have a relatively equal chance at having only one winner. 

Also, each American Powerball ticket costs $2, which means that as long as there's only one winner, the relative value of a Lotto ticket at ($1.64/$1.46) $1.12 is 3.5 times higher than the relative value of a Powerball ticket at ($0.64/$2.00) $0.32.



So given the choice, playing the UK Lotto is about 3.5 times better than playing the American Powerball. Unfortunately for me, being in the US, you need to be in the UK to purchase a Lotto ticket, whether online or in person.

However, it's an interesting thought experiment, which I'm sure I'll be glad that I took the time for once I've won the Powerball tonight. And, just in case I don't, you can always reach out to us for free financial advice, whether you've won the lottery or not.