With deposit interest rates on the rise, term investment rates are looking more appealing. But how do you choose between a term deposit or BNZ term PIE (Portfolio Investment Entity)?
On the face of it these two options seem very similar. Both investments have a minimum investment of $2,000 1. Both have a variety of term lengths up to five years to suit your saving goals, no establishment or management fees, and have the same advertised fixed interest rates over the same term.
So, what are the differences?
Portfolio investment entities (or PIEs) have rules that mean your after-tax returns could be higher than the returns from a term deposit. You’ll be taxed at your prescribed investor rate (PIR) instead of your personal income tax rate. So, if you pay income tax at the top rates of 30%, 33%, or 39%, you’ll pay less tax on your PIE returns because the maximum PIR is 28%2.
Investing in a BNZ Term PIE could suit you if:
- you pay income tax at rates of 30%, 33%, or 39%
- you’ve gone back to work after being away for at least two years
- you’ve had an increase in salary and you’re now paying a higher rate of income tax
- you’re a trust with a trustee tax rate of 33% or 39%, or a trust beneficiary on a 30%, 33%, or 39% income tax rate.
Term PIEs have a tax advantage where the PIR is less than the Resident Withholding Tax (RWT) you’d pay. RWT is the tax that is deducted from the interest that you, as a New Zealand resident, earn from term deposits.
What does that mean?
The highest RWT rate is 39%. However, the highest PIR is 28%. So, if you earned $100 interest on an investment, under RWT you‘d pay $39 on the interest, whereas with a PIR of 28% you’d pay only $28 on the interest earned.
Unlike a term deposit, BNZ Term PIE doesn’t pay PIE tax each time interest is paid on it. Instead, it’s paid when a tax event occurs. For a compounding investment, that would normally be at maturity at, or around, 31 March (if the investment crosses year end). Instead, the gross income compounds at each compounding event, rather than the net income. This means that the investment amount the following months’ returns are calculated on, is higher in value.
Depending on your investment term, you can choose to have interest from your Term PIE investment paid monthly, quarterly, six monthly, annual or at maturity. Term deposit interest is paid monthly or at maturity.
What about the benefits of term deposits?
Term deposits can be opened and managed online, whereas a Term PIE investment needs to be opened in branch or through your Private Banker. Term deposits have some shorter terms available (7 days- 29 days – while the shortest term PIE term is 30 days). Term PIEs require a little more administration, including an application form for new investments.
What can the tax difference look like?
As an example: if $1m was invested in both a term deposit and a Term PIE with the following attributes:
• 12 month term
• Interest rate of 5.5%
• Individual with a tax rate of 39%
• Monthly compounded interest:
|Term deposit||Term PIE|
|End investment value||$1,034,158||$1,040,430|
|Interest earned after tax||$34,157||$40,430|
That’s a difference of $6,2733,43,4
Note: BNZ Term PIE doesn’t pay PIE tax on compounding returns. The difference in this example will be bigger for a BNZ Term PIE because monthly income is not taxed before being compounded (unless there’s a PIE tax event during the term, including 31 March tax event).
If you’d like to discuss your investment options, contact your Private Banker to discuss the most suitable options for your individual circumstances.
1 BNZ minimum investment rate – minimum investment rates between banks vary.
2 There is a flow chart that you can use to work out your PIR and see if a Term PIE is a good option for you: Working out your PIR.
3 Deposit calculations taken as at 14 March 2023 from: Deposit calculator | interest.co.nz
4 Monthly compounded income is net of tax (RWT/PIE tax) in this example.
This article is solely for information purposes. It’s not financial or other professional advice. For help, please contact BNZ or your professional adviser. No party, including BNZ, is liable for direct or indirect loss or damage resulting from the content of this article. Any opinions in this article are not necessarily shared by BNZ or anyone else.
Account opening criteria and Standard T&Cs apply. Minimum deposit $2,000. Term deposit rates are only available for the first $5 million of total deposits you hold with BNZ. Contact us for help with larger amounts.
BNZ Term PIE is offered and managed by BNZ Investment Services Limited, a wholly owned subsidiary of Bank of New Zealand (BNZ). BNZ Term PIE T&Cs apply. An investment in BNZ Term PIE does not represent a deposit or other liability of BNZ or any other member of the National Australia Bank Limited group, and is subject to investment risk, including possible delays in repayment and loss of income and principal invested. None of BNZ, any other member of the National Australia Bank Limited group, or any other person guarantees (either partially or fully) the capital value or performance of the investment.