PIE Funds vs Regular Funds: Which Saves You More Tax?

You've probably heard that PIE funds offer tax advantages. Your KiwiSaver is probably in one. Your managed fund might be too. But here's what often gets glossed over: PIE funds don't automatically save everyone tax. Whether they benefit you depends entirely on your prescribed investor rate (PIR) compared to your marginal tax rate.

This matters more as you approach retirement because your income often changes significantly. Understanding how these investment structures work helps you make informed decisions about where to hold your retirement savings.

A Portfolio Investment Entity (PIE) is a special type of investment structure created by the New Zealand government in 2007. The key feature is that your investment income (interest, dividends, and realised gains) gets taxed at your PIR rather than your marginal tax rate.

Your PIR has three possible rates according to IRD guidelines:

• 10.5%: If your taxable income in either of the previous two tax years was $14,000 or less
• 17.5%: If your taxable income in either of the previous two tax years was $48,000 or less (but more than $14,000)
• 28%: If your taxable income in both of the previous two tax years was more than $48,000

Notice something important here: your PIR is based on previous years, not your current income. This creates interesting planning opportunities, especially around retirement.

Most KiwiSaver funds are PIE structures, as are many managed funds offered by banks and investment providers. The PIE structure handles the tax calculation internally, and you don't need to declare PIE income in your tax return (though you can if you want to claim a refund).

Regular managed funds (non-PIE structures) work differently. When the fund makes distributions to you, whether from dividends, interest, or realised capital gains, those distributions are taxed at your marginal tax rate.

New Zealand's marginal tax rates currently are:

• 10.5% on income up to $14,000
• 17.5% on income between $14,001 and $48,000
• 30% on income between $48,001 and $70,000
• 33% on income between $70,001 and $180,000
• 39% on income over $180,000

If you're earning $80,000 a year, your investment income from a regular fund gets taxed at 33%. If you're earning $190,000, it gets taxed at 39%.

However, regular funds have one advantage PIE funds don't: they can pass through imputation credits. When a New Zealand company pays dividends, it often includes imputation credits representing tax already paid at the company level. In a regular fund, these credits flow through to you and can reduce your overall tax bill. PIE funds can't utilise these credits in the same way.

The tax advantage of PIE funds becomes clear when there's a gap between your PIR and your marginal tax rate. Let's look at realistic scenarios.

Scenario 1: The High Earner

You're 55 and earning $120,000 a year in salary. Your marginal tax rate is 33%. You have $200,000 in investments outside KiwiSaver generating $10,000 in annual returns.

• In a regular fund: You'd pay $3,300 in tax (33% of $10,000)
• In a PIE fund: You'd pay $2,800 in tax (28% PIR, the maximum rate)
• Annual saving: $500

Over 10 years until retirement, assuming similar returns, that's $5,000 in tax savings, plus the compound growth on money that stayed invested rather than going to tax.

Scenario 2: The Recent Retiree

You're 66, just retired, and now living on NZ Super ($27,664 for a single person living alone as of 2024) plus drawing $20,000 annually from savings. Your total taxable income is around $47,000, putting you in the 17.5% marginal bracket.

But here's where it gets interesting: your PIR is still based on the previous two years when you were earning a full salary. If you earned over $48,000 in both of those years, your PIR is still 28%.

In this case, a PIE fund actually costs you more tax than a regular fund would (28% PIR vs 17.5% marginal rate). This is a common trap for new retirees.

Scenario 3: The Part-Time Worker Approaching Retirement

You're 62 and have reduced your hours. You're now earning $35,000 a year, putting you in the 17.5% tax bracket. You have this income level for two consecutive years, so your PIR drops to 17.5%.

You have investments generating income. In a PIE fund, you pay 17.5%. In a regular fund, you'd also pay 17.5% on distributions. The advantage here is neutral on the tax rate itself, but PIE funds still offer administrative simplicity as the tax is handled within the fund.

Here's where the comparison gets more nuanced. If your investments include New Zealand shares (directly or through a fund), imputation credits become relevant.

When you receive a dividend from a NZ company, it typically includes imputation credits. These represent tax the company has already paid. In a regular fund structure, these credits can offset your tax liability. If your marginal rate is lower than the company tax rate (28% for most companies), you might even get a refund.

PIE funds don't pass imputation credits through to investors in the same way. They use them differently within the fund structure, but you don't get the direct benefit.

For investors with significant NZ share exposure, this can make regular funds more attractive, particularly if your marginal rate is 30% or below. The imputation credits can effectively reduce your tax on dividend income below your stated marginal rate.

Factors to consider when weighing this aspect:

• What percentage of your portfolio is in NZ shares versus international investments?
• How much of your return comes from dividends versus capital gains?
• What's the typical imputation credit ratio on your investments?

International investments don't generate NZ imputation credits, so this factor only matters for the NZ share component of your portfolio.

Selecting the wrong PIR causes real problems. If you select a PIR that's too low, you'll owe tax to IRD plus interest and possibly penalties. If you select one that's too high, you overpay tax, and while you can claim a refund, most people don't bother with the paperwork.

Your PIR is based on your taxable income in the previous two tax years. Taxable income includes salary, wages, business income, NZ Super, and most investment income. It doesn't include PIE income itself, which creates a helpful compounding effect.

Common PIR mistakes:

• Not updating after retirement: You retire and your income drops significantly, but you forget to change your PIR from 28% to a lower rate
• Using current income instead of previous years: You assume your PIR should match this year's income, but it's actually based on the last two tax years
• Not considering NZ Super: When you start receiving NZ Super, this counts as taxable income and might push your PIR higher
• Forgetting about both spouse's incomes: If you have joint investments, each person should use their own PIR based on their individual income

The IRD provides a PIR calculator on their website to help you determine the correct rate. It's worth checking annually, particularly in the years around retirement when your income may be changing.

Tax rates dominate the PIE versus regular fund conversation, but other factors matter too.

Administrative Simplicity

PIE funds handle tax internally. You don't receive a tax certificate for PIE income (though providers must give you one if requested), and you don't need to include it in your tax return unless you're claiming a refund. For many investors, this simplicity has real value.

Regular funds send you tax certificates showing distributions and any imputation credits. You need to include this information in your annual tax return. If you're already filing a return for other reasons, this isn't a big burden. If you'd otherwise not need to file, it's extra administrative work.

Flexibility with Losses

In a regular fund structure, capital losses can potentially offset other income in some circumstances. PIE funds handle gains and losses internally, and you can't use PIE losses to offset other income.

For most retirement-focused investors, this isn't a primary concern, but it matters if you have other significant income sources or complex tax situations.

Foreign Investment Fund (FIF) Rules

Both PIE and regular funds must deal with New Zealand's FIF rules for international investments. However, PIE funds often handle this more efficiently because they calculate FIF income at the fund level rather than passing the complexity through to individual investors.

If you hold international shares directly (not through a fund), you're personally responsible for FIF calculations. This is genuinely complex and why many investors prefer managed funds for international exposure.

As you approach and move through retirement, your optimal investment structure might change. Here are factors that influence the PIE versus regular fund decision in a retirement context.

The Two-Year Lag Creates Opportunities

Because PIR is based on the previous two years, you can do some planning around major income changes. If you're retiring at 65, your PIR will reflect your working income until age 67. This might mean PIE funds are less attractive for the first two years of retirement if your income drops significantly.

However, some investors deliberately keep their PIR at 28% even when they could drop it lower. The reasoning: administrative simplicity and avoiding the risk of getting it wrong and facing penalties.

Consider Your Full Picture

Your KiwiSaver is almost certainly in a PIE fund, so you already have PIE exposure. The question is often about where to hold additional savings outside KiwiSaver.

If you have investments both inside and outside managed funds, you might benefit from having both structures: PIE funds for international exposure and tax efficiency at high income levels, and perhaps direct NZ share ownership (or regular funds) to capture imputation credits.

Income Volatility Matters

If your income fluctuates significantly year to year (common for self-employed people or those with variable investment income), the two-year lookback for PIR can sometimes work in your favour and sometimes not. Regular funds respond immediately to your current tax situation, which might be preferable if you have genuinely unpredictable income.

The truth is, there's no universal answer to whether PIE or regular funds are better. The optimal choice depends on your specific circumstances: your income level, where you are in your career or retirement journey, what you're investing in, and how much you value administrative simplicity.

Questions to consider when evaluating your situation:

• What's your current marginal tax rate, and what will it likely be in retirement?
• What was your taxable income in the previous two years (which determines your current PIR)?
• How much of your investment portfolio is in NZ shares versus international investments?
• How important is administrative simplicity versus potentially optimising every tax dollar?
• Are you comfortable managing the requirements of regular funds, including tax certificates and returns?

For many higher-income earners still in the workforce, PIE funds offer clear tax advantages. For retirees with modest incomes, the benefit becomes less clear, and imputation credits from NZ share investments might actually make regular structures more attractive.

What matters most is understanding how these structures work so you can have an informed conversation with your investment provider or make decisions aligned with your overall retirement tax strategy.

Important: This article is general information only and does not constitute personalised financial advice. For advice tailored to your situation, speak with a licensed Financial Advice Provider. You can find a registered adviser at fma.govt.nz.