PIE Funds vs Term Deposits

If you pay a top tax rate and are considering placing a sum in a term deposit, you could maximise your returns by investing in a PIE fund instead.

What is a PIE fund?

PIE stands for Portfolio Investment Entity. It’s a financial product that invests in low-risk passive investments, such as a bank’s deposit accounts.

A PIE, or term fund, acts exactly like a term deposit, offering a fixed rate of return over a set investment period. And just like a term deposit, there are usually no joining or management fees.

But there is one important point of difference between a PIE and a term deposit: any interest you earn from a PIE is taxed at your prescribed investor rate (PIR), instead of your personal income tax rate.

And, across the board, PIRs are a lot lower than income tax rates.

What are the prescribed investor rates?

Like your income tax rate, your PIR depends on your earnings. Roughly, PIRs break down into three annual income bands:

• PIR 10.5%: $48,000 or less
• PIR 17.5%: $48,000-$70,000
• PIR 28%: $70,000+

And these tax rates compare very favourably with the income tax rates:

• 17.5%: $14,000-$48,000
• 30%: $48,000-$70,000
• 33%: $70,000-$180,000
• 39%: $180,000+

If you’re not sure about your PIR, it’s easy to check, here at the IRD’s site. 

PIE fund = less tax, greater returns

If you earn over $48,000 per year, by investing in a PIE fund over a term deposit, you’re sure to pay less of the interest you earn as tax. This improves the overall effective interest rate you earn on your money.

Not all banks offer PIE funds alongside term deposits, but a comparison of the rates on offer from those that do reveals the obvious: the higher your income tax bracket, the greater the tax savings to be had from a PIE fund.

The chart below compares the banks’ 12-month term deposit rates with their PIE funds’ effective interest rates once tax savings are factored in.

	12-month term deposit rate	PIE Fund rate Effective rate 30%*	PIE Fund rate Effective rate 33%**	PIE Fund rate Effective rate 39%***
	6.10%	6.28%	6.56%	7.20%
	5.90%	6.07%	6.34%	6.96%
	5.90%	6.07%	6.34%	6.96%
	5.90%	6.07%	6.34%	6.96%
	5.90%	6.07%	6.34%	6.96%
	5.85%	6.02%	6.29%	6.90%

*Applies to investors with taxable income of $48,001 to $70,000.
**Applies to investors with taxable income of $70,001 to $180,000.
***Applies to investors with taxable income of $180,000+

Note: approx figures correct as of 03/08/23. For up-to-date interest rates check out our story:

→ Related article: Best PIE Funds in NZ

PIE funds: things to consider

While a high interest rate is important, it isn’t the only factor to consider when looking for a PIE fund. Some other factors you might want to keep in mind include:

Fixed time period

Choose your time wisely, because term deposits can be inflexible. For example, if you need to access your money before the end of the term, your bank may charge you a penalty fee and ask you to give them a period of notice.

Interest rates

They tend to vary a lot, depending on the provider and the term. As movements in both directions are possible, it pays to shop around.

Compound interest

Interest can be compounded at different frequencies, such as monthly, semi-annually and annually. The compounding frequency, the number of compounding periods and the interest rate can determine the amount of interest earned on a term investment.

Deposit size

Check whether there is any minimum amount needed to open a term deposit, and if a higher interest rate is offered for a larger amounts. It may be worthwhile depositing more than you originally considered to achieve a better rate.

Fees and charges

Are there any penalties charged for early withdrawals or any other fees involved?

For a full rundown of all the up-to-date term deposit rates on Canstar’s database, just click on the button below.

Compare Term Deposits

About the author of this page

This report was written by Canstar’s Editor, Bruce Pitchers. Bruce has three decades’ experience as a journalist and has worked for major media companies in the UK and Australasia, including ACP, Bauer Media Group, Fairfax, Pacific Magazines, News Corp and TVNZ. Prior to Canstar, he worked as a freelancer, including for The Australian Financial Review, the NZ Financial Markets Authority, and for real estate companies on both sides of the Tasman.