Ben Kelleher, managing director retail and business banking at the ANZ, said low interest rates had reduced the investment returns of the scheme affecting the size of its prize pool.
"It has now become apparent those trends are likely to continue in the medium term. The Official Cash Rate, currently at a historically low 0.25 per cent, may fall further in early 2021 as the global economy grapples with the impacts of Covid-19.
"The ANZIS [ANZ Investment Services] Board decided it is no longer appropriate to accept new investment into Bonus Bonds with immediate effect, and intends to start winding up the scheme no later than the end of October."
Winding up the scheme will mean money is returned to bondholders.
Last year the New Zealand Herald reported that bonus bonds were in the sights of the financial watchdog the Financial Markets Authority as part of its work around legacy products that may no longer be suitable for investors.
The FMA's response came after the Herald queried the regulator over complaints and concerns about Bonus Bonus after revealing an ANZ staffer had written to the bank's chief executive and board concerned about the product and calling it the "biggest rort in financial services in New Zealand" and asking for the fees to be cut.
ANZ cut the fees on Bonus Bonds in July from 1.15 per cent to 0.88 per cent but said it made the decision to do so before receiving the anonymous letter from the employee.
There is around $3.25 billion invested in Bonus Bonds which is managed by ANZ Investment Services - a subsidiary of ANZ bank.
Instead of getting interest on their investments savers go into a monthly draw to win a prize of up to $1 million but the odds of winning a prize are low and have been getting worse.
The latest annual report says the average odds were one in 32,294 of winning a prize in any given month, down from one in 26,875 in its 2018 financial year.
Around 1.3 million Kiwis have bond bonds. They were launched by the New Zealand Government through the Post Office in 1970.
ANZ's Kelleher said it intended to still hold the September and October prize draws as scheduled and customers could continue to redeem their Bonus Bonds until winding up starts.
"However, ANZIS might move to an earlier wind up, for example, if there is a heavy demand for redemptions or it otherwise considers it is in the overall best interests of investors to do so."
Kelleher said investors had two choices.
"They can redeem their Bonus Bonds before the scheme starts to wind up, or stay in the scheme and be entitled to a share of the remaining reserves, after expenses, when the scheme is wound up," he said.
"Those who choose to stay during the wind-up phase will have their investments locked in during this process, which may take up to 12 months.
"The board believes current reserves are sufficient for bondholders to be confident they will receive back their initial investment. The reserves represent the surplus of the value of assets in the scheme over the claims of bondholders."
