KEY POINTS:
Why would you pay 39 per cent tax, or even 33 per cent, on cash deposits when you could pay only 30 per cent?
"You'd have to have rocks in your head," is the blunt reply from Anthony Edmonds, head of sales and marketing at AMP Capital Investors.
He would say that, of course: AMP has just launched a fund that will enable people on the 39 per cent tax rate to reduce the tax on interest from their savings to 30 per cent. But even allowing for the marketing hyperbole, Edmonds has a point and he is not the only person in the investment industry to be making it.
"There is a large part of the population who would be better off with these products," says John Bolton, a former general manager of products for ANZ who is now principal of Squirrel Financial Solutions, a firm of advisers that specialises in low-risk products.
The device that delivers this tax cut is the cash PIE; a cash version of the Portfolio Investment Entity created by the Government last year. PIEs allow investors to be taxed at their own personal rates, whereas managed funds were previously taxed at rates that looked penal compared with various other forms of investment. From April 1, the tax break on PIEs was boosted further for higher-rate taxpayers with the introduction of a new 30 per cent maximum rate. Any managed fund can be a PIE, provided it fulfils certain criteria, but the new twist is that banks and other institutions are launching and promoting the cash versions.
Market conditions could not have been kinder to promoters; a troubled sharemarket, high interest rates and a new mood of risk aversion after the collapse of a string of finance companies.
Edmonds says a 39 per cent taxpayer would need a rate of 9.85 per cent on a one-year term deposit, (with interest paid annually) to match the 8.25 per cent being paid at the end of last week on the AMP cash PIE, the Cash Advantage Fund, which invests in a Rabobank deposit. Returns are boosted by the daily compounding of interest, while tax is paid only once a year.
Jeff Matthews, of financial adviser Spicers, says his firm's new cash PIE for clients, paying 8.25 per cent last week, offered an effective rate of 8.62 per cent to a 33 per cent taxpayer and 9.47 per cent for a 39 per cent taxpayer.
Squirrel Financial Solutions has published a table (www.mysquirrel.co.nz) giving examples of cash gains available by investing in PIEs versus non-PIE deposit accounts. Someone on an income of $50,000 and holding $300,000 in deposits would earn an extra $1560 net income per year through a PIE, assuming an interest rate of 8 per cent. The extra income for a $100,000-a-year earner with $300,000 of deposits would be $2160.
There are already a number of cash PIEs in the market. Bolton says, broadly, those with a limited number of functions and facilities attached are paying about 8.2 per cent to 8.3 per cent, while those with more facilities are paying around 8 per cent.
There are caveats and cautions.
Returns are variable and are likely to start falling within the next year. Some in the industry believe that fixed-term PIEs will eventually become available but Edmonds says they will be "more challenging from an operational perspective".
Advisers suggest that those who want some certainty about future returns on their cash should consider a mixture of investments alongside PIEs, for cash and cash-type portfolios. Matthews points to several corporate bonds available that allow investors to lock in rates of 9 per cent or more over three to four years.
Bolton suggests locking into fixed terms of three to five years now to take advantage of the high rates available.
Investors also need to understand that cash PIEs come in a variety of forms, from those offering a simple cash deposit with one institution, to managed cash funds, where managers can invest, within certain criteria, across a range of institutions.
Managed cash funds may also invest more widely than in vanilla-style deposits. They may use corporate and local authority bonds as well as short term cash deposits and possibly mortgage-related funds. Managed funds enable investors to diversify the spread of institutions they invest with, but investors need to look at a fund's investment criteria to understand the range of investments it can use and whether there is any risk of capital loss.
Investors also need to look at whether there are management charges on their cash PIE.
