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  1. #1
    Member tobo's Avatar
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    Default Term Deposit versus PIE term deposit

    For those on 30 or 33% tax rates, it would seem obvious to choose a PIE term deposit over a straight Term Deposit. It is only taxed at 28% (or whatever lower prescribed rate). I think the interest also does not add to your income for tax bracket determination.
    A Term Deposit is held with the bank, but the PIE deposit is held by a trust.
    As far as I can see there is a tax benefit and no difference in risk of loss of capital (eg. bank going bankrupt still impacts the trust anyway).
    What is the catch? Why is the TD still offered? Is the TD only still offered because it makes no difference to lower income earners?

  2. #2
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    Quote Originally Posted by tobo View Post
    For those on 30 or 33% tax rates, it would seem obvious to choose a PIE term deposit over a straight Term Deposit. It is only taxed at 28% (or whatever lower prescribed rate). I think the interest also does not add to your income for tax bracket determination.
    A Term Deposit is held with the bank, but the PIE deposit is held by a trust.
    As far as I can see there is a tax benefit and no difference in risk of loss of capital (eg. bank going bankrupt still impacts the trust anyway).
    What is the catch? Why is the TD still offered? Is the TD only still offered because it makes no difference to lower income earners?
    There is a catch and there is extra risk involved. Going into a PIE is similar to going into a managed fund. The benefits of a PIE aren't very transparent as generally PIE rates are lower than TD rates. Second you're dealing with a separate entity under PIE than with TD that is issued directly with the bank. The bank is more secured than the PIE fund operations. Don't be fooled that there are no managements fees, the difference is given by the lower PIE rate than the TD interest rate.

    Term Deposit rates for large sums can be negotiated for better rates - you can't do this under PIE. They will take the cash and work their own contracts to skim a margin on the day the funds are deposited.

    But let's be serious... why are people putting their cash in such low interest return deposits??? IMO Cash is only served as a way to buy when the opportunities come (such as the recent CoronaVirus outbreak). Or use the cash to leverage into buying another house because if you factor the after tax on the TD or PIE TD, less inflation rate, the real rate of return after tax is well... pretty disappointing.

  3. #3
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    Quote Originally Posted by SBQ View Post
    There is a catch and there is extra risk involved. Going into a PIE is similar to going into a managed fund. The benefits of a PIE aren't very transparent as generally PIE rates are lower than TD rates. Second you're dealing with a separate entity under PIE than with TD that is issued directly with the bank. The bank is more secured than the PIE fund operations. Don't be fooled that there are no managements fees, the difference is given by the lower PIE rate than the TD interest rate. ....
    ANZ Term Pie rates are the same as ANZ Term Deposit rates.

  4. #4
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    Quote Originally Posted by Bjauck View Post
    ANZ Term Pie rates are the same as ANZ Term Deposit rates.
    You can't negotiate rates with the PIE but you can with the Term Deposit rate. The difference is considerable if you know the right person.

  5. #5
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    Quote Originally Posted by SBQ View Post
    You can't negotiate rates with the PIE but you can with the Term Deposit rate. The difference is considerable if you know the right person.
    Do you know what amount of money for term deposit you would need to be able negotiate a higher rate? How much higher an interest rate can you negotiate? It does not sound to be a very transparent - or a particularly fair situation.

  6. #6
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    Quote Originally Posted by Bjauck View Post
    Do you know what amount of money for term deposit you would need to be able negotiate a higher rate? How much higher an interest rate can you negotiate? It does not sound to be a very transparent - or a particularly fair situation.
    Over 10 years ago there was a man I always went to at the BNZ branch in Sydenham, Chch. It didn't matter on the amount I would want to roll over but we would sit in his office and he would work the BNZ terminal doing his magic. What he did was he would fudge # in the interest rate cell (working at real time market rates) and the difference was at least over 1% more than advertised TD board rate. Keep in mind, the rates back then peak at 9% but over the years I met him, he would always spend a few minutes on the screen and work the interest rate figures (his method was he would start high and gradually work lower in 0.01% increments). Unfortunately he transferred to Auckland so my man that offered me the best rates were no more.

    Of course the average person doesn't have access to such better rates. But I do find it's not out of the ordinary to ask for a better rate if you're putting in more than $50K in term deposit. You're not going to get that rate over the phone. You really need to see the person at the branch or your 'bank manager' you deal with (and in close relations). They call up the trading desk and get a 'dealer rate' confirmation. I can't speak for other banks in NZ how they work.

  7. #7
    Member tobo's Avatar
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    Thanks for clarification. (The cash is, as you suggested, cash waiting for crash value buying. I want to keep some in the event of a longer/larger decline than the last few weeks...A bob each way at the moment.)

  8. #8
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    Quote Originally Posted by tobo View Post
    What is the catch? Why is the TD still offered? Is the TD only still offered because it makes no difference to lower income earners?
    It is probably not a common situation, but there can be an advantage to an ordinary TD vs a PIE TD for someone on a low tax rate who has excess imputation credits, as they can use the excess credits to offset all the tax paid on the ordinary TD, but not for a PIE TD.

  9. #9
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    Quote Originally Posted by turnip View Post
    It is probably not a common situation, but there can be an advantage to an ordinary TD vs a PIE TD for someone on a low tax rate who has excess imputation credits, as they can use the excess credits to offset all the tax paid on the ordinary TD, but not for a PIE TD.
    Good point.
    Also if you select too high a PIR rate than is actually required for your income level, you are unable to get a refund of the PIE tax already paid. Whereas if you select the top RWT rate for a TD, you can always get a tax refund for any excess paid, after filing a tax return for the relevant tax period.

    However, If you select too low a PIR rate on your PIE income for your annual income level, then you could need to pay extra tax as though it were regular interest income. So I think PIE income can end up becoming quite complex for the individual. I guess the intention had been to encourage savings by offering a slightly reduced tax level. DYOR.
    Last edited by Bjauck; 10-03-2020 at 07:34 AM.

  10. #10
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    "But let's be serious... why are people putting their cash in such low interest return deposits???"

    Sometimes, having the money out of the way of temptation can be important. There can be reasons other than the simple one of interest rate.

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