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PIE are we waiting?

Friday, December 14th 2007, 8:36AM 7 Comments

by Philip Macalister

PIEs are the greatest things in the investment market since sliced bread (if you’ll excuse the poor pun). This has been clearly demonstrated with the enthusiasm fund managers have had in baking PIE-compliant funds across their product range, and excitement by managers to introduce new funds to the market which are tax efficient. There has been one notable exception though, which in my view is significant. That exception is in the area of cash PIEs and in particular alternatives to bank term deposits. Currently there is a flood of money finding its way to bank coffers on the back of troubles in the finance company sector. No doubt much of that money is invested by people on tax rates other than 33%. The simple conclusion here is that banks aren’t necessarily doing their customers a great service. What is also fascinating is that we have attempted to find out what banks are doing in this space, yet all the ones we have talked to have been pretty tight-lipped. It makes one wonder whether there are problems, not so much with the product manufacturer, but maybe more with technology issues? Since the PIE rules came into effect on October 1 there have been plenty of PIE funds available. The only cash PIE we are aware of is one made by AMP Capital and marketed through RaboPlus. It’s a pretty appealing product for advisers and investors. While its blackboard rate is 8.00%, for a 39% tax payer, we are told, that the effective rate is 8.79%. While it is being pushed by Rabo to retail customers, we understand AMP Capital has put it on the major platforms (Aegis and FNZ) for advisers to use.
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Comments from our readers

On 14 December 2007 at 10:39 am Murray Weatherston said:
Hi Phil

Cash and term deposit PIEs are being worked on right around the market. My guess is the problem is that issuers are having difficulty getting the costs of the PIE below the tax savings.

A number of managers will show the advantage to a 39 cent tax payer. This overstates the case in my mind as there is no need for anyone to pay 39 cents on their investment income - ever heard of a Trust?

Rabobank's cash PIE is thesimplest version - they accept money at call and they invest the money at call. So this obviates all the issues faced by a TD PIE.

An 8% return taxed at 33% gives 5.36% after tax; for a 39c taxpayer to receive this from an investment taxed in their own name, they would need to earn 8.79% per tax. [When PIE rate falls to 30%, these numbers change to 5.6% and 9.18% respectively]

It seems to me that the issuer makes money by paying the investors in the PIE a lower pretax rate 8.0% than the rate Rabobank pays on call deposits ordinarily (8.20% p.a.). The PIE investor arbitrages the crazy tax differentials the PIE regime introduced.

With a term deposit, you can go into the bank on any day and get a 1, 2 3 4 5 6 etc month deposit. For a truly equivalent TD PIE, on every day the issuer would have to create a new class of investment for each term they offered on that day. The number of classes would rapidly escalate - which is where I think all the cost and technology issues are.

I reckon once one bank comes to market with a cash PIE they will all be forced to join suit - even if it is unprofitable for them all in the short term. Deja vue Kiwisaver!

The sooner the NZ tax system has restored the beauty of the top tax for individuals = the trust rate = company rate = PIE rate the better. Recent tax changes have introduced incentives to spend all one's time on arbitraging the tax system rather than building a better outcome.
On 14 December 2007 at 7:18 pm Anthony Edmonds said:
Phil

The benefits from PIE to lots of investors is significant.

To date all the articles have been about the benefits of PIE to 39% tax payers. This is an obvious area to focus on, as an investor on a 39% tax rate would have to have rocks in their head not to invest in a PIE. As your blog highlights, a "blackboard" rate of 8.00% is equivalent to earning 8.79% from a directly held investment (for a 39% tax payer). From 1 April 2008, this increases to around 9.18%. Next year you might also want to look at the impact of different compounding methods (but let's leave this until next year for now).

What amazes me still is the lack of commentary on the PIE benefits regarding the ability of people to now earn up to a maximum of $60,000 per annum, and stay on a 19.5% tax rate, provided more than $22,000 (of the $60,000) comes from PIEs. By my calculations, someone who didn't work for an income (like a stay-at-home parent) could have an investment portfolio of roughly $800,000 and still remain on a 19.5% tax rate - provided they invest in PIEs.

Another scenario (again by my calculations) is that a retired couple couple getting NZ Superannuation could have around $1.55 million of investments and stay on a 19.5% tax rate.

Advisers should be very excited by PIE (at least on behalf of their clients). I am happy to take people through how the math works supporting the examples shown above.

I will be interested in the response from advisers to the Cash Advantage Fund being now available on FNZ and Aegis.

Regards

Anthony Edmonds
On 17 December 2007 at 7:57 am Philip said:
So Rabo/AMP Capital isn't the first cash PIE - just the loudest!
Steven from ING emailed in:
I have seen a number of references over recent weeks to the Rabo / AMP Cash offering being the first Cash PIE available

For the record, both cash products managed by ING - ANZ FlexiCash and Thoroughbred Cash Fund - have been PIEs since 01 October 2007. Both products are on call and invest into cash/deposit assets. The Thoroughbred Cash Fund is currently yielding 8.14% and the ANZ FlexiCash, just below 8%.
On 8 March 2008 at 1:43 pm Ian Bone said:
Phil,

Don't know that I altogether agree with the comment that a 39% taxpayer would "have to have rocks in his head" not to invest in a cash PIE. But the bank sure seems to do well out of it, mainly at the expense of Dr Cullen.

Current offerings are 8.75% on a 12 month (say $100,000) term deposit and an 8.00% cash PIE. Assuming that the cash PIE product has negigible extra management costs over a TD, and with the 30% tax rate from 1 April, by my reckoning a 39% taxpayer stands to gain a modest $262.50 while the bank creams $750, while the Government loses $1,012.50 in RWT.

Or am I missing something ?
On 1 April 2008 at 6:48 pm Mike said:
I hope someone can help me with this general question about funds.

The new Cash Advantage Fund from Rabo bank is managed by AMP Capital - with the money in the funds being invested in a Rabobank account. The AAA rating of Rabobank is attractive, but what would happen if AMP Capital got into trouble? Is the capital in a fund still owned by the fund holders and simply managed by the fund manager, or does the fund become another assest on the managers books with a promise to the fund holders.

If AMP Capital went down the tubes (like Bear Stearns) would the fund holders still own their share of the fund and be able to get it back?
On 1 April 2008 at 8:34 pm darryl said:
how safe are the people administering these PIE products? If AMP goes bust Rabo will not want to know you. For a percent or so less at least you are investing with the bank.
On 2 April 2008 at 12:48 pm darryl said:
http://www.raboplus.co.nz/blog/post/PIE-IRD-get-their-monies-170308.aspx

Interesting answers on their website to my questions. They don't answer, they just go round in circles.
Commenting is closed

 

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Lender Flt 1yr 2yr 3yr
AIA 4.55 2.55 2.69 2.79
ANZ 4.44 2.89 3.25 3.39
ANZ Special - 2.29 2.69 2.79
ASB Bank 4.45 2.29 2.59 2.65
Bluestone 3.49 3.34 2.99 3.34
BNZ - Classic - 2.29 2.59 2.79
BNZ - Mortgage One 5.15 - - -
BNZ - Rapid Repay 4.60 - - -
BNZ - Std, FlyBuys 4.55 2.89 3.19 3.39
BNZ - TotalMoney 4.55 - - -
CFML Loans 4.95 - - -
Lender Flt 1yr 2yr 3yr
China Construction Bank 4.49 4.70 4.80 4.95
China Construction Bank Special - 2.65 2.65 2.80
Credit Union Auckland 5.45 - - -
Credit Union Baywide 5.65 3.95 3.85 -
Credit Union South 5.65 3.95 3.85 -
First Credit Union Special 5.85 2.95 3.45 -
Heartland 3.95 2.89 2.97 3.39
Heartland Bank - Online 2.50 1.99 2.35 2.45
Heretaunga Building Society 4.99 3.50 3.40 -
HSBC Premier 4.49 2.25 2.35 2.65
HSBC Premier LVR > 80% - - - -
Lender Flt 1yr 2yr 3yr
HSBC Special - 1.99 - -
ICBC 3.69 2.25 2.35 2.65
Kainga Ora 4.43 2.79 3.04 3.13
Kainga Ora - First Home Buyer Special - 2.25 - -
Kiwibank 3.40 3.20 3.50 3.50
Kiwibank - Offset 3.40 - - -
Kiwibank Special 3.40 2.35 2.65 2.65
Liberty 5.69 - - -
Nelson Building Society 4.95 3.20 3.24 -
Pepper Essential 4.79 - - -
Resimac 3.39 3.35 2.99 3.35
Lender Flt 1yr 2yr 3yr
SBS Bank 4.54 2.79 2.79 3.15
SBS Bank Special - 2.29 2.29 2.65
Select Home Loans 3.49 3.34 2.99 3.34
The Co-operative Bank - First Home Special - 2.09 - -
The Co-operative Bank - Owner Occ 4.40 2.29 2.59 2.79
The Co-operative Bank - Standard 4.40 2.79 3.09 3.29
TSB Bank 5.34 3.09 3.29 3.45
TSB Special 4.54 2.29 2.49 2.65
Wairarapa Building Society 4.99 3.55 3.49 -
Westpac 4.59 3.09 3.29 3.39
Westpac - Offset 4.59 - - -
Lender Flt 1yr 2yr 3yr
Westpac Special - 2.29 2.69 2.79
Median 4.54 2.79 2.99 2.96

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