If you’re 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%: $53,500 or less
- PIR 17.5%: $53,501-$78,100
- PIR 28%: $78,101+
And these tax rates compare very favourably with income tax rates:
- 17.5%: $15,601-$53,500
- 30%: $53,501-$78,100
- 33%: $78,101-$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
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.
At the moment, the PIE fund interest rates on offer from the banks range from around 4% to 5% p.a. Below is an overview of the effective rates in that band, once you factor in PIRs.
| Example PIE Fund 12-month rate |
Effective rate 30%* | Effective rate 33%** | Effective rate 39%*** |
| 4.00% | 4.11% | 4.30% | 4.72% |
| 4.20% | 4.32% | 4.51% | 4.96% |
| 4.40% | 4.53% | 4.73% | 5.19% |
| 4.60% | 4.73% | 4.94% | 5.43% |
| 4.80% | 4.94% | 5.16% | 5.67% |
| 5.00% | 5.14% | 5.37% | 5.90% |
*Applies to PIE investors with taxable income of $53,501-$78,100.
**Applies to PIE investors with taxable income of $78,101-$180,000.
***Applies to PIE investors with taxable income of $180,000+
Not all banks offer PIE funds alongside term deposits, but for the up-to-date PIE fund rates from ones that do, check out our story: 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. So 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.
About the author of this page
Bruce Pitchers is Canstar NZ’s Content Manager. An experienced finance reporter, he has three decades’ experience as a journalist and has worked for major media companies in Australia, the UK and NZ, including ACP, Are Media, Bauer Media Group, Fairfax, Pacific Magazines, News Corp and TVNZ. As a freelancer, he has worked for The Australian Financial Review, the NZ Financial Markets Authority and major banks and investment companies on both sides of the Tasman.
In his role at Canstar, he has been a regular commentator in the NZ media, including on the Driven, Stuff and One Roof websites, the NZ Herald, Radio NZ, and Newstalk ZB.
Away from Canstar, Bruce creates puzzles for magazines and newspapers, including Woman’s Day and New Idea. He is also the co-author of the murder-mystery 5 Minute Murder.
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