Comparing savings accounts should be easy as pie.
Unfortunately, for New Zealand's latest class of savings account, that's far from the case, and experts warn against making an investment based on advertised savings rates.
PIE cash funds are the hottest thing in deposits this year, and are flying off the shelves in response to big TV, billboard, online and shop window advertising campaigns.
They were introduced last year to take advantage of new tax rules (the Portfolio Investment Entities rules) which from April 1 this year capped at 30 the top rate of tax that investors would pay on returns from PIE funds.
The banks, led by RaboPlus, realised that if a term deposit or on- call account could be replicated in a PIE fund, it would improve the after tax returns of 33 percent and 39 percent taxpayers.
These breaks can easily turn an 8.3 percent advertised rate into a 9.9 percent-plus effective rate for top rate taxpayers, making term deposits and even online on-call accounts look lacklustre by comparison.
But while term deposits and online call accounts are all easily compared because their terms are generally standard, that's not the case with cash PIEs.
All 90-day bank term deposits compound every 90 days, and all the bank online call accounts compound monthly, which makes comparing them easy (though the compounding effect lifts their effective rates), whereas some PIE funds compound daily and some monthly.
Similarly some PIE funds make distributions (either an interest payment to another account, or the creation of new units) monthly, while others do it quarterly or, in the most tax advantageous case, annually.
Such differences are far from just technical, says Anthony Edmunds of AMP.
"Simply comparing 'blackboard' rates of different cash PIE funds does not provide investors with a real like-for-like comparison," he said. "Two PIE cash funds with the same advertised rate, may provide quite different net returns to investors."
Take the example of the RaboPlus and Kiwibank on-call cash PIEs, which are both offering blackboard rates of 8.3 percent.
RaboPlus's 8.3 percent translates into an effective 9.92 percent return over a year, as it compounds daily and distributes (and hence pays the taxman) annually.
Kiwibank's translates into 9.78 percent because it compounds and distributes monthly.
Even without the compounding and distribution differences between PIEs, investors need to take care which they choose, as some banks are being far more generous than others.
For the 39 percent taxpayer there's a $98 difference in the after tax return of the major banks' PIE cash funds, which led ASB to run an online ad campaign last week suggesting rivals might be "clipping the ticket" by offering lower rates on PIE cash funds under the cover of the tax breaks.
In putting together the accompanying tables, Edmunds said he ran into difficulties because investment statements and bank call centres were often vague on the details, further emphasising how hard it can be for the public to make comparisons.
Rabobank's Mike Heath added: "The devil is in the detail and to be honest getting your head around the detail is not as easy as reading the investment statements.
"I've been reading quite a few over recent weeks and, in some instances, I've had to resort to calling the helpdesks of some of the banks as I couldn't be certain my interpretation of the investment statements was correct."
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Source: Sunday Star-Times | Sunday, 27 July 2008