Tax Benefits of a Cash PIE
When it comes to saving money there are plenty of ways to go about it, but if you’ve never considered term deposits, term PIE or cash PIE because you simply didn’t know what they are, we’re here to fix that. These are all what the banking industry calls ‘managed funds’ (this refers to the way the bank makes use of your investment while it’s in their care) and they all offer different ways for you to achieve the best possible return on your savings.
A term deposit is very much like a savings account, you deposit your money with the bank and they pay you interest in return. However, there are a couple of important differences.
First, unlike a savings account, a term deposit has a minimum deposit amount. It varies from bank to bank, but if we take BNZ as an example, the minimum deposit is $2000 and the maximum, if you’re lucky enough to have it, is $5,000,000.
Second, your money will be locked away for a predetermined period of time. The shortest term is 30 days whereas the longest term is 5 years. It’s up to you which term you choose, but the longer the term, the better the interest rate.
Interest rates vary and can change at any time, so check your bank’s website for the latest rates. Once you’ve locked in a term deposit, that interest rate is locked in, too.
For term deposits less than a year in length, interest will be paid at the end of the term (called the maturity date). If your term is a year or longer, you can choose to have the interest paid out quarterly, six monthly, annually or at maturity.
Why might a term deposit work for me?
Term deposits might be a good choice for people who have some spare money that they know won’t be needed for a period of time. The longer you’re able to commit your money, the better the returns. If you need to withdraw your funds early you must inform your bank as soon as possible and understand there will be a reduction in the interest paid to you.
Tip: To get an idea of how returns might improve if you invest in a term deposit or PIE, try our calculator.
You’ve probably already guessed that cash PIE isn’t referring to a tasty treat in this case. It actually stands for Portfolio Investment Entity and works like a savings account, except it falls under a specific set of tax rules. These rules mean if your income falls into one of the two top tax brackets, it might be possible for you to get better returns.
These better returns depend on the amount of tax you pay on the interest your savings make. With a standard savings account, the tax rate is the same as your income tax rate. This is 30% for people earning between $48,001 and $70,000, and 33% for over $70,000. Compare this to the top tax rate for cash PIE, which is 28%, and you can see how your returns can improve related to how much you earn.
This is why the cash PIE interest rate looks a little low compared to term deposits and savings accounts. You make up the difference in the tax savings. There are a few other details in the way the tax rates work with your income, you can find out more about this at this link.
Why might a cash PIE work for me?
If you pay tax at one of the top two rates, Cash PIE might be a good way to get improved returns. It has a minimum deposit of $1000 and there’s no fixed term so the barriers to entry are relatively low, and because you can keep your money in there for as long as you like, and take it out at any time, it might also be a good choice for people who aren’t sure when they might need access to savings.
Tip: We’ve created a few ‘real world’ examples of how PIE might work in practice for different types of investors.
Term PIE is like a mix between term deposits and cash PIE. It features the same special tax rules which makes it possible for people who pay tax at one of the top two rates to get better returns. At the same time, you can get a better interest rate by committing your savings to being locked away for a set period of time.
Why might a term PIE work for me?
Term PIE has fixed terms and a minimum deposit of $5000, so might suit a person who knows they won’t be needing that money for a specific period of time. Because of the special tax rules, people who pay either 30% or 33% income tax are potentially able to get better returns than term deposits and savings accounts.
Supercharge your savings with term deposits
Decide how long you want to put your savings away, lock in one of our rates, then sit back and watch your savings grow.