KEY POINTS:
There's a new option for bank account and finance company debenture savers that is set to significantly reduce tax bills. Until recently, most investors in term deposits and debentures paid their highest tax rate on the interest payments they received, which meant many handed 33 per cent or 39 per cent of their interest payments over to the government.
Now there's a new type of term deposit or debenture that can reduce that tax bill and it's thanks to a government attempt to encourage wealthier investors to put money in share market funds. Happily for more conservative investors, banks and finance companies are now setting up these Portfolio Investment Entities (PIEs) so that savers can use them to invest in bank accounts and debentures. These PIE accounts offer a return taxed at 30 per cent rather than the 33 per cent or 39 per cent tax rates for wealthier taxpayers.
This means that a PIE account offering 8.6 per cent earns just as much for a 39 per cent taxpayer as a regular account offering 9.87 per cent. In layman's terms, this is a no-brainer for a 39 per cent taxpayer as long as the fees and any restrictions aren't too painful.
One thing to look for with a PIE is whether it is managed by the a bank or is outsourced to a fund manager. The outsourced ones tend to have expensive fees, typically 0.5 per cent. Cash PIEs also don't allow cash withdrawals from ATMs or branches, but it's usually not too hard to transfer money online to a regular account that does allow withdrawals. Another thing to check is that the PIE invests in the bank's own term deposits and cash accounts. That means the bank's PIE is as safe as the bank itself.
ANZ and National Banks offer a PIE that is managed by ING, which is half owned by ANZ. ASB has just launched its own self-managed fund and Westpac offers a fund managed by BT Funds Management, a subsidiary of Westpac. BNZ does not offer a PIE yet.
ASB's cash PIE offers 8.25 per cent with no fees and compares well with ANZ's 7.59 per cent with 0.5 per cent fees. Kiwibank's cash PIE offers 8.3 per cent with no fees, while National Bank has 8.16 per cent with 0.5 per cent fees. RaboPlus offers 8.3 per cent with no fees and UDC has its own PIE call account fund of 8.25 per cent with no fees.
UDC, however, is the only finance company to have PIE accounts. Southland Building Society and Nelson Building Society have PIEs too.
Recommendation: The best cash PIE is from RaboPlus on 8.30 per cent, which has interest that compounds daily while tax is paid annually. The minimum deposit is $250 and there are no fees. The equivalent return for a 39 per cent taxpayer is 9.92 per cent, according to RaboPlus.
The best shorter term PIE deposit account is Kiwibank's five-month PIE at 8.60 per cent or an effective 9.87 per cent for a 39 per cent taxpayer. It also has no fees and interest is paid on maturity. The best longer term PIE is UDC's 12-month Term Maximiser with an 8.9 per cent interest rate or an effective 10.21 per cent.
Bernard Hickey is the managing editor of www.interest.co.nz, a website for investors and borrowers wanting free and independent news and information about interest rates, banks, finance companies and the economy.
