Sunday Star-Times Panel
Got a question about money? The Sunday Star-Times Panel - Miranda Caird of mortage broker Roost, David Steele for sharebroker Forsyth Barr and independent financial advisors Peter Hensley and Lisa Dudson - can give you an answer.
Who wants a slice of PIE?
Q: I have $900,000 in term deposits in several banks. My intention is to build a new house in a couple of years once I have topped it up with a bit more interest. I have been surprised by the lack of material about PIE compliant investments in the papers etc but have noticed it has got a mention of late in the Sunday Star - Times. I have received no contact whatsoever from my current banks (Westpac and BNZ) informing me of what is available. Kiwibank certainly seems to be first away for the starting blocks and deserves credit for this. Kiwibank seems to have embarrassed them [the other banks] into action and I see that Westpac has since come to the party with a PIE option but nothing from BNZ yet. I pretty much intend to take all my funds and put them into a Kiwibank PIE term deposit fund. My question is how you rate he risk involved in this compared to leaving the money in term deposits, particularly in the current environment?
Dudson writes: Cash PIEs are effectively that - cash. They have the same risk profile as Term Deposits. The only difference is the structure around them, the PIE which is used because it is more tax effective for those in marginal tax brackets of 33% or 39% which you will most likely be.
Rabobank was one of the first banks to offer a cash PIE. Note that with the Kiwibank PIEs they can only be held in an individual's name, not a company or trust, which I thought was quite odd. When choosing a cash PIE check the liquidity terms as I understand they vary from daily to monthly. I would imagine there will be quite a bit being developed in this area in the future given they are currently so new.
David Steele writes: My own experience has also been that many banks appear to have been slow to offer PIE funds and/or communicate the advantages of PUE structures to their customers. To be fair, the rule changes enabling PIEs are still relatively new. The advent of PIE call and term deposit accounts is significant - in particular, for a 38% tax payer, the tax savings from transferring the money into an equivalent PIE structure (where tax is capped at 30%) are substantial.
Rabobank has been one of the most responsive of the retail banks in this area, predominantly marketing and providing PUE alternatives as well as explaining PIE in plain English. They are a useful benchmark to compare against your own bank (check out: www.raboplus.co.nz/cash-fund).
Trading banks which offer cash and term deposits that are structured using a portfolio investment entity (PIE) do not expose savers to additional risk, unless these funds are invested in different underlying assets. All the major retail banks are rated AA or better and are strictly regulated to all have very low default risk. My general advice to my own clients is to use the bank that offers the best rate and best service.
The more important risk for you to manage, I'd suggest, is where interest rates may go from here - thinking about the term/mix of your deposits us as important as placing your funds within a tax-efficient PIE. If your time horizon was two years (say) including some deposits of this length in the mix to lock in rates now is worth consideration.
Read the full article here.