How your credit card can save you money
For people looking to invest and grow their savings, the two most common go-to options will be savings accounts and term deposits. However, for anyone falling into the two top tax brackets, Cash PIEs and Term PIEs can potentially offer even better returns.
What is a Cash PIE?
First things first, PIE actually stands for Portfolio Investment Entity. It’s a managed investment (KiwiSaver is, for example, also a managed investment scheme) that adheres to special tax rules. If you happen to fall into the right tax bracket, a PIE could save you more money than other types of investment simply because you’ll pay less tax on your savings.
We’ll explain the tax situation further down below, but to give you a better idea of what a PIE is, think of it this way: Cash and Term PIEs are very similar to savings accounts and term deposits. Cash PIE works very much like a savings account where you can access your savings at any time. Term PIE, on the other hand, is most similar to a term deposit where your money is locked away for a predetermined period of time. In both cases, the money you invest in a PIE returns interest and -- just like term deposits and savings accounts -- the amount of interest you earn varies depending on the amount you invest and the length of time it remains locked away.
How does a PIE save me money?
Generally, PIEs are best suited to people on higher incomes. This is because we all pay different rates of tax based on how much we earn -- the more you earn, the higher the tax rate. The same goes for your savings and investments.
If you earn between $48,000 and $70,000, your tax rate for savings (called a prescribed investor rate or PIR) will be 30%. If you earn more than $70,000 you’ll pay 33% on those savings. This is where PIEs, with a maximum tax rate of 28%, can put more money in your pocket than regular savings accounts or term deposits.
In case you’re wondering, anyone earning less than $48,000 will pay less than 28% on any savings, which is why PIE tends to make sense only for people on higher incomes.
Term PIEs have minimum and maximum investment amounts. While the exact amounts will vary between banks, to use BNZ as an example, the minimum investment amount is $5000 and the maximum is $1,000,000.
Any money invested in a Term PIE will be locked away for a set period of time, usually anywhere from 30 days to five years.
The interest paid changes based on the length of the term.
Cash PIE lets people access their money at any time, so it’s more like an on-call savings account. There are no fixed terms and there’s a sole interest rate which may seem low at a first glance compared to a savings account. However, remember you’ll be paying less tax, which is where the benefit lies.
Because the amount of tax paid on investments and savings is calculated using either of your previous two years’ income, it’s possible that there will be temporary tax savings available to some people. BNZ has put together four case studies to help demonstrate how these scenarios can come about. Check them out here.
BNZ Cash PIE
A tax-smart investment that works like an on-call account, so you can withdraw your money at any time, but with the benefit of potentially paying less tax.