Term PIEs vs Term Deposits: The After-Tax Difference
💰 Same interest rate, different tax
A term deposit and a term PIE can look almost identical from the outside. You lock a lump sum away for a fixed term at a fixed interest rate, and at the end you get your money back with interest. The difference that matters is tax. A term deposit's interest is taxed at your own marginal income tax rate, which can be as high as 39%. A term PIE, which is a portfolio investment entity, is taxed instead at your prescribed investor rate (PIR), and the top PIR is capped at 28%. That single cap is the whole story: if your marginal tax rate is above 28%, a term PIE paying the same headline interest rate hands you a better after-tax return than a term deposit. This guide shows exactly how much better, how to work out your own PIR, what it costs to use the wrong one, and the cases where a plain term deposit is just as good. It is general information, not personalised financial advice.
How a term deposit is taxed
When your bank pays interest on a term deposit, it deducts resident withholding tax (RWT) before the money reaches you. You tell the bank which RWT rate to use, and you should pick the one that matches your marginal income tax rate. If your chosen rate is wrong, Inland Revenue squares it up in your year-end assessment. The rates you can choose are the same as the income tax brackets.
| Your taxable income | Marginal tax rate | RWT rate on interest |
|---|---|---|
| $0 to $15,600 | 10.5% | 10.5% |
| $15,601 to $53,500 | 17.5% | 17.5% |
| $53,501 to $78,100 | 30% | 30% |
| $78,101 to $180,000 | 33% | 33% |
| Over $180,000 | 39% | 39% |
If you give the bank your IRD number but choose no RWT rate, it deducts at 33% by default. If you give no IRD number at all, the no-notification rate of 45% applies. Always give your IRD number and pick the rate that matches your income.
How a term PIE is taxed
A term PIE is run as a portfolio investment entity, the same tax structure used by KiwiSaver and most managed funds. Instead of RWT, the fund taxes your share of the interest at your prescribed investor rate. For an individual there are only three PIR options, and the top one is 28%.
| PIR | Who it applies to |
|---|---|
| 10.5% | Lower earners (see the two-year test below) |
| 17.5% | Middle earners |
| 28% | Everyone else, and the maximum for individuals |
Because the top PIR is 28%, a term PIE never taxes your interest above 28%, no matter how much you earn. A term deposit, by contrast, taxes the same interest at 30%, 33% or 39% once your income moves into those brackets. That gap is where the after-tax advantage comes from.
They look similar, but a term PIE is a managed fund, not a bank deposit. That matters for deposit protection, covered in Section 3. It also means you must give the fund your IRD number and PIR. If you do not, the fund applies the default PIR of 28%, and for a new investment you have six weeks to supply your IRD number or the account is closed.
📊 Where the after-tax difference shows up
The headline interest rate is only half the picture. What you keep is the headline rate minus tax. Since the term PIE caps tax at 28% and the term deposit does not, the two paths diverge as soon as your marginal rate climbs above 28%.
The same $1,000 of interest, taxed five ways
Imagine both products pay you $1,000 of interest in a year. Here is what you keep, side by side, at each income level.
| Marginal rate | Term deposit: keep | PIR | Term PIE: keep | PIE advantage |
|---|---|---|---|---|
| 10.5% | $895.00 | 10.5% | $895.00 | $0 |
| 17.5% | $825.00 | 17.5% | $825.00 | $0 |
| 30% | $700.00 | 28% | $720.00 | $20.00 |
| 33% | $670.00 | 28% | $720.00 | $50.00 |
| 39% | $610.00 | 28% | $720.00 | $110.00 |
Turning it into an after-tax interest rate
Another way to see it is to convert the headline rate into an after-tax rate. Take a headline rate of 5.00% and compare a 39% taxpayer's after-tax return each way.
To match the term PIE's 3.60% after-tax return, a term deposit would have to pay a much higher headline rate. For a 39% taxpayer that break-even headline is 3.60% ÷ (1 − 0.39) = 5.90%. In other words, a 5.00% term PIE beats any term deposit paying less than about 5.90% for someone on the top rate.
When a plain term deposit is just as good
If your marginal rate is 10.5% or 17.5%, the 28% cap does nothing for you, because you are already taxed below it. A term PIE and a term deposit at the same headline rate return exactly the same after tax. In that case, choose on the practical points instead: the headline rate on offer, the term, ease of access, and, importantly, deposit protection. A term PIE can even work out slightly worse if it carries a management fee that a plain term deposit does not, so read the fine print.
A term PIE helps only if your marginal tax rate is above the 28% cap. That means the 30%, 33% and 39% brackets, which start once your taxable income passes $53,500. Below that, treat the two as interchangeable and shop on rate, term and protection.
🧮 Working out your PIR (and what is the same)
To get the term PIE's tax advantage you have to give the fund the correct PIR. Your PIR is not simply this year's tax bracket. It is worked out from your income over the last two income years, and you get to use the lower rate the two years allow.
The two-year income test
Look at each of the last two income years. For each year, add your taxable income and your attributed PIE income together, then apply these rules. Your PIR is the lowest rate that either year qualifies for.
| PIR | Qualifying test in either of the last two years |
|---|---|
| 10.5% | Taxable income $15,600 or less, and taxable income plus PIE income $53,500 or less |
| 17.5% | Not 10.5%, but taxable income $53,500 or less, and taxable income plus PIE income $78,100 or less |
| 28% | Everything else |
Because you take the lower of the two years, someone whose income has just risen can keep a lower PIR for a while. That is a genuine bonus, not a loophole: it is exactly how the rules are written.
If your PIR is too low, you underpay tax through the year and Inland Revenue adds the shortfall to your year-end assessment, so you get a bill. If your PIR is too high, you overpay. Since 1 April 2020 that overpayment is refunded or credited in your automatic year-end assessment, but you wait months to get it back rather than keeping it working for you. Either way, the right PIR avoids surprises.
What is genuinely similar
Set tax aside and term PIEs and term deposits are close cousins. Both lock your money away for a fixed term. Both pay a fixed, agreed interest rate, and the headline rates on offer are usually in the same ballpark because the money is doing the same job. Both restrict early access, often with a break cost or notice period. Both suit money you will not need for the term and that you want to keep safe rather than grow aggressively.
Deposit protection is the real difference
Here is where they part company. New Zealand's Depositor Compensation Scheme (DCS) started on 1 July 2025 and protects eligible deposits up to $100,000 per depositor, per licensed deposit taker, if that institution fails. A standard bank term deposit is an eligible deposit and is covered. A term PIE is a managed fund, and PIE units are generally not protected deposits, so many term PIEs sit outside the DCS. Some bank term PIEs are structured so the underlying money is held as a protected deposit and are covered, but this varies by product.
Do not assume a term PIE carries the same $100,000 protection as a term deposit. Every licensed deposit taker must publish a list of its DCS-protected products. Check that list, or ask the provider directly, before deciding a term PIE is covered. If protection matters more to you than a small tax saving, that can tip the decision back toward a plain term deposit.
🔢 Four worked examples
These use round headline rates for clarity. The arithmetic is what matters, and it works the same way at whatever rate your bank or fund is actually offering.
Situation: Aroha earns over $180,000, so her marginal rate is 39%. She has $50,000 to lock away for 12 months. A term deposit and a term PIE both offer a 5.00% headline rate.
Gross interest either way:
Term deposit, taxed at 39% RWT:
Term PIE, taxed at her 28% PIR:
Situation: Tom earns $45,000, which puts his marginal rate at 17.5%. His two-year income test also gives him a PIR of 17.5%. He has $20,000 to invest for a year, again at a 5.00% headline rate.
Gross interest either way:
Term deposit (17.5% RWT) and term PIE (17.5% PIR):
Tom's rate is already below the 28% PIR cap, so the cap gives him nothing. For him the two products are interchangeable on tax, and he should choose on the headline rate, the term, and whether he wants the certainty of DCS deposit protection, which favours the term deposit.
Situation: Priya's income has risen. Two income years ago her taxable income was $49,000; last year it was $58,000. Her PIE investments attribute about $2,000 of income to her a year. Which PIR should she give her term PIE?
Apply the two-year test:
Why getting it right pays:
Priya's low rate will not last forever. Once neither of her last two years qualifies for 17.5%, her PIR steps up to 28%. It is worth checking your PIR at the start of each tax year and telling your provider if it changes.
Situation: Wiremu earns $90,000, so his marginal rate is 33% and his PIR is 28%. He has $30,000 to invest. His bank offers a term deposit at 5.20%, while a term PIE offers a slightly lower 5.00%. The higher headline looks better, but does it win after tax?
Term deposit at 5.20%, taxed at 33%:
Term PIE at 5.00%, taxed at 28%:
Related tools and guides
- Term Deposit vs PIE Fund Calculator runs this after-tax comparison on your own numbers.
- PIE PIR Rate Calculator helps you work out your prescribed investor rate.
- RWT on Interest Calculator shows the tax on a term deposit at your rate.
- Term Deposit Calculator projects the interest on a term deposit.
- How Term Deposits Actually Work, Understanding PIE Funds and The Depositor Compensation Scheme Explained.
- Term PIEs vs Term Deposits, a related guide in the same area.
- Periodic vs Fixed-Term Tenancies, a related guide in the same area.
- Saving a Deposit, a related guide in the same area.
- Saving for a House Deposit Guide, a related guide in the same area.
- Short-Term vs Long-Term Financial Goals, a related guide in the same area.
Sources: Inland Revenue, Prescribed investor rates and Find my prescribed investor rate (ird.govt.nz); Inland Revenue, New Zealand resident individuals' PIE income and default 28% rate (ird.govt.nz); Inland Revenue, Using the right resident withholding tax (RWT) rate (ird.govt.nz); Inland Revenue, End-of-year PIE calculation and income tax assessments (ird.govt.nz); Reserve Bank of New Zealand, Depositor Compensation Scheme (rbnz.govt.nz). Figures are current for the 2026/27 tax year. Verified 24 July 2026.
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