PIE are we waiting?

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.

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

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%.

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 ?

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?

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.

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.