Question:

What are the pros and cons of this PIE investment opportunity that all the banks are advertising?

I have just put a significant amount from my savings account into a cash
fund which my bank investment adviser said was just the savings account wrapped in a tax break, no difference at all.

And most importantly for me, it has the same risk attached. (I am a very "low-risk" person).

Answer:

The pros of PIEs - or portfolio investment entities - far outweigh the cons. In fact, I'm struggling to think of a con, as long as your money is as accessible as you want.

PIEs, which came into being in October 2007, are managed funds. They include almost all KiwiSaver funds and many other savings funds as well as vehicles similar to savings accounts and term deposits.

Many PIEs that invest in cash - probably including the one you have invested in - are likely to be covered by the Government's new deposit guarantee scheme.

They are eligible to be included as long as:

• "They invest exclusively in New Zealand Government securities or debt securities issued by institutions covered by the Crown guarantee, and

• "They do not increase their investments in guaranteed institutions that are not registered banks beyond the level that existed as at October 12, 2008."

The second requirement is to stop a cash PIE from taking advantage of the situation by boosting its investments in finance companies covered by the guarantee, which are likely to pay higher returns.

It's taking a little while for the Government's guarantees to be put in place, but I suggest you ask your bank if your PIE is likely to be covered by the guarantee. If not, move to a cash PIE that is covered.

Non-cash PIEs, which invest in other assets such as shares, corporate bonds or property, won't be covered by the guarantee scheme.

However, all PIEs have the following other attractive features:

• The highest tax rate for any investor in a PIE is 30 per cent. This is helpful to people earning $40,000 to $70,000, who normally pay 33 per cent, and particularly good for those earning more than $70,000, who normally pay 39 per cent.

• Lower-income investors will in most cases be taxed at 19.5 per cent on their PIE income. This is of some help to those earning $14,000 to $40,000, who normally pay 21 per cent - although those earning less than $14,000 would be worse off in a PIE investment.

• What's more if, in any of the two prior years, your non-PIE taxable income is below $38,000 a year, and your total taxable income including PIE income is below $60,000 a year, then all of your PIE income will be taxed at 19.5 per cent.

It sounds a bit complicated, but think it through. If it would apply to you, it could mean big tax savings.

• A PIE that invests in New Zealand shares and/or in most large Australian listed shares won't be taxed on capital gains on those shares, even if the shares are traded frequently.

• In the past, schemes that traded frequently did pay tax on that income. Managed funds that haven't become PIEs still do - as do some direct investors in shares.

• If you don't currently have to file a tax return, being in a PIE won't change that. You are taxed in much the same way as bank savings accounts are taxed. The money goes to Inland Revenue without your bothering about it.

• As long as your PIE income doesn't have to be declared on a tax return, it won't affect entitlements such as Working for Families, child support, or repayments on student loans. This could make a big difference to some people.

You may have noticed that the PIE cutoffs, at $38,000 and $60,000, are different from the new income tax cutoffs, at $40,000 and $70,000. That's because managed funds need time to adjust their systems to accommodate the tax cuts, says a Treasury spokesman.

The Government is considering adjusting the PIE rules to line up with the tax changes, but it "has not made any decisions on how or when the PIE rates would be changed", he adds. Any changes are likely to make PIEs even more attractive for many investors.

Mary Holm is the author of bestselling books on KiwiSaver and personal finance. She is also a highly praised seminar presenter. Her written advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following that advice.