The uninspiring name for these accounts puts people off. But it makes sense if you are a 30% or 33% taxpayer to get your head around Pies for the sake of your savings. This is because the tax paid on a PIE fund is capped at 28%.
Cash Pies are very similar to cash accounts. You can make cash deposits and withdrawals and earn much the same interest rate. The added bonus is that you pay a lower rate of tax on these savings than your marginal rate, meaning your savings grow faster overall.
Another way to look at it is you earn a higher savings interest rate in effect than the one advertised. If, for example, you’re a 30% tax payer and you invest in a Cash Pie offering a 3% interest rate paid monthly, you will pay less tax on your earnings than you would in a regular savings account, giving you an effective rate of 3.12% or if you’re a 33% taxpayer, your return will equal 3.26%.
It’s also worth looking out for Pie term deposits, which, like regular on call cash Pie accounts, are taxed at the lower rate.
Points to look out for:
- Comparing Pie savings rates isn’t as simple as you would think. You need to look at the “effective rate”. That’s the rate that you actually get once your own marginal tax rate is taken into account.
- You also need to check out whether the interest is paid monthly or quarterly. The latter can slow growth.
- Read the fine print to find out about fees. Make sure you know what fees apply to the account, any fees you pay will bring down the effective rate and could make a normal cash account a better investment.
- Finally, make sure that you’re paying the right tax rate. With Pies and Kiwisaver accounts you need to let your bank or provider know what your prescribed investor rate (PIR) is each year. Rates change over time and so does your financial position.