KEY POINTS:
Bank Deposits
There is a story in banking circles that when asked to name the greatest invention in human history, Albert Einstein replied "compound interest", says Wayne Besant, managing director of ANZ Retail Banking.
The magic of compound interest, in other words earning interest on interest, is what
makes cash deposits such an attractive form of saving, he says.
Cash deposits are held for terms of 30 days to five years or more. This provides the certainty of a fixed interest rate and the interest is either paid regularly or at the end of the term. A warning, if you withdraw your money ahead of the maturity rate you will incur a "break cost".
Call accounts, which you have constant access to, tend to be compounded monthly or paid out as income.
After the finance companies collapses more money has gone into bank deposits.
And there is good reason for it. The banks are offering highly attractive interest rates on cash deposits, anything from 7.8 per cent to 9 per cent for a one year term. Bank deposit rates are usually tiered so that the more money you have, the better the rate. In other words a $100,000 deposit will give you a better rate than $10,000.
The international credit crunch has dried up liquid cash. This has pushed up the
price of the cost of wholesale funding and triggered recent interest rate rises for fixed mortgages.
"The upside for New Zealand investors is that with deposit rates so high, the aftertax returns on bank cash deposits have never looked so good. And the tax benefits of the PIE makes the tax-paid returns even better." says Besant.
What is PIE?
A PIE (Portfolio Investment Entity) is a tax effective managed fund. They range from "on-call" cash management accounts to funds that invest in assets such as fixed interest, property and shares. PIEs do not tax capital gains on New Zealand and most Australian shares (as is the case with conventional managed funds), and tax on income from New Zealand dividends and cash investments is capped at 33 per cent (falling to 30 per cent on 1 April), or 19.5 per cent if that is your marginal tax rate.
This means that by investing in a PIE, effectively investors receive more interest. If a return of 10 per cent is taxed at 39 per cent, the tax-paid return is 6.1 per cent. If that same return is taxed at 33 per cent, the tax paid return is 6.7 per cent.
Online banking
New Zealanders, fast adapters that they are, have taken to online banking with their usual alacrity. The obvious advantage are that they save on bank fees using online banking because they are doing more things for themselves, for instance moving money from one account to the other.
According to the Nielsen Online Consumer Finance Monitor in February, two thirds of people who used the internet, (68 per cent) have accessed an online banking site in the last month. The most popular banking sites include ASB, Westpac and the National Bank, with over half a million unique browsers a
month.
"Once they use the internet, people of all ages adopt online banking with enthusiasm," says Donald Sheppard, associate director, Financial Services
Research at Nielsen.
He says 80 per cent of those under 40 used online banking in the last month. For older people online banking is becoming common practice. "62 per cent of people over 55 visited an online banking site in the last month," he says.