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.
| PIE Fund 12-month rate |
Effective rate 30%* | Effective rate 33%** | Effective rate 39%*** | |
 |
4.85% | 4.99% | 5.21% | 5.72% |
 |
4.80% | 4.94% | 5.16% | 5.67% |
 |
4.75% | 4.89% | 5.10% | 5.61% |
 |
4.75% | 4.89% | 5.10% | 5.61% |
 |
4.75% | 4.89% | 5.10% | 5.61% |
 |
4.75% | 4.89% | 5.10% | 5.61% |
*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 11/12/24. 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.
About the author of this page
Bruce Pitchers is the Content Manager at Canstar New Zealand. An experienced finance reporter, Bruce has three decades’ experience as a journalist and has worked for major media companies in Australia, the UK and New Zealand, including ACP, Are Media, Bauer Media Group, Fairfax, Pacific Magazines, News Corp and TVNZ.
Bruce started his career as an entertainment journalist before turning his pen to sport and fitness content, working for some of Australia’s leading sports magazines. Bruce then moved his focus to the world of finance and worked as a freelance writer and editor 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’s Cooking the Books podcast, Radio NZ, and Newstalk ZB.
Away from his desk at Canstar, Bruce spends many hours creating and editing puzzles for magazine and newspaper titles in the USA and Australasia, including Woman’s Day and New Idea. To that end, he is the co-author of the murder-mystery puzzle book 5 Minute Murder.
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