Written by Tom Stanley, Investment Adviser, 31st May 2023
A question to ponder while reading this note: Are you (or your business) sitting on lazy money?
It’s ok… I am not about to dig into one of the major ancient Greek epic poems. This month I am leaning into a lesson learned in an ‘eventful and adventurous journey’ of the great Homer Simpson and how it can apply to those holding cash.
While growing up, I religiously tuned into the Simpsons each evening – One episode burned in my memory is “King-Size Homer”. For those who watched the Simpsons, you may remember it as the episode where Homer wears a muumuu and initiates a nuclear meltdown, for those who weren’t Simpsons fans, some context:
“King-Size Homer” is the seventh episode of the seventh season of the American animated television series The Simpsons. It originally aired on the Fox network in the United States on November 5, 1995. In the episode, Homer despises his work’s (the nuclear power plant’s) new exercise program and decides to attain a weight of 300 pounds (136 kg) so he can claim a disability and work from home (avoiding exercise).
Homer eventually increases his weight to 315 pounds (143 kg) and his boss (Mr. Burns) installs a stay-at-home work terminal in the Simpson house. Homer’s wife (Marge) admits that she finds herself less attracted to Homer because of his weight gain, but he vows to prove he can be a better worker because of it.
Homer soon tires of his monotonous responsibilities as a safety inspector and resorts to simply typing “yes” every time the system prompts him. Looking for shortcuts, he leaves his terminal with a drinking bird to press the Y key to indicate “yes” on the keyboard and goes to the cinema. After being denied admission due to his weight and getting teased by people outside the theater, Homer returns to find that his bird has fallen over and a nuclear meltdown is imminent unless the system is manually shut down.
Unable to call the plant because his fingers are too fat to dial a telephone keypad, and too heavy to drive or skateboard, Homer resorts to hitchhiking. Drivers refuse to pick him up because his bright muumuu and excited jabbering make him seem like a lunatic. After hijacking an ice cream truck…”
I’ll stop there, in the end Homer does save the day (read on here)… But I want to talk to the emphasised line above:
“Looking for shortcuts, he leaves his terminal with a drinking bird to press the Y key to indicate “yes” on the keyboard”.
Since the Global Financial Crisis, near zero interest rates have meant channelling our inner Homer Simpson and automatically ‘accepting’ the low rates being paid on our bank cheque or savings accounts hasn’t been a problem – i.e. we weren’t missing much having ‘lazy money’ sitting around. But that picture has changed dramatically in the past year. Since the start of 2022 returns on cash have gone from 0% to over 5% at the time of writing.
The graph from Goldman Sachs Investment Research below shows something very important. It illustrates the remarkable surge in cash returns since the start of 2022 relative to the previous 25-year period. The graph may look a bit complicated, but the main idea is clear: investors haven’t received such good returns for holding cash in the past 25 years compared to what they can earn today. At the same time, returns for other types of investments, like stocks or bonds, are currently in the middle range of what they’ve been over the past 25 years.
BUT when it comes to cash, not all holding places are equal – in this note we set aside the ‘drinking bird’ that automatically presses ‘yes’ and keeps your cash in your cheque account, and dig a little deeper.
For those tactically holding cash or holding cash for short-term goals, this note will hopefully shed some light on where you can get the best bang for your buck.
The primary places you can hold cash and get a decent return are typically:
- On-call Savings Account
- Notice Saver Account
- Term Deposits
- Cash Funds
Each of these places to hold cash offer different returns and pros/cons – lets dig in.
- On Call Savings Accounts (most flexibility, lowest return):
An account that allows you to freely deposit and withdraw money without any penalties. These accounts are typically taxed at your income tax rate (up to 39%) and are as ‘safe’ as the underlying bank you are invested with – Unlike the United States or Australia where bank deposits have a $250,000 government guarantee.
Many Kiwis have a savings account with their bank, but organisations such as Sharesies have recently created ‘Sharesies Save’, an on-call account offering higher interest than a typical bank savings account – How do they do it? Sharesies is not a registered bank or deposit taker, so they don’t hold the money you deposit into their savings product, the funds are held directly with their bank with interest passed through to the investor. Sharesies institutional banking relationship (ASB) means they command a higher on-call interest rate than a typical retail customer, Sharesies are simply passing through some of the benefit of this higher interest rate.
The interest you are paid on these accounts varies typically week over week or month over month with prevailing interest rates.
At Amicus, the investment platform we use is Consilium Wrap. Consilium Wrap leverages the same approach as Sharesies Save, passing through higher on-call interest rates through its wholesale relationship with BNZ – How do the on-call rates compare?
- Westpac Simple Saver – 2.50%
- ANZ Online Savings – 2.55%
- ASB Savings On Call – 2.65%
- Rabobank RaboSaver – 4.00%
- BNZ Rapid Save – 4.30%
- Kiwibank On-line Call – 4.35%
- Heartland Direct Call – 4.60%
- Sharesies Save – 4.60%
- Consilium On-Call – 5.00%
These on-call accounts could also be compared to bonus saver accounts that accrue higher interest rates. However, these accounts penalise you with a lower interest rate if you withdraw your money or fail to increase your balance by a certain amount each month so haven’t been considered further in this note.
- Notice Saver Accounts (less flexibility, moderate returns):
Instead of being able to withdraw your money immediately, a notice saver requires you to give your bank at least 32 days’ notice before you can access it. In return for the lower accessibility of your money, you get a slightly higher interest rate.
- Westpac 32 day Notice Saver – 4.50%
- Kiwibank 32 day Notice Saver – 4.55%
- Heartland 32 day Notice Saver – 5.25%
- Kiwibank 90 day Notice Saver – 5.10%
- Rabobank 60 day NoticeSaver – 5.10%
- Heartland 90 day Notice Saver – 5.50%
- Term Deposits (locked in, normally highest return – not at the moment):
Term deposits work differently to on-call and notice saver accounts. With a term deposit, you lock up your money for a fixed period and get paid a fixed rate of interest (either periodically or on maturity).
You can go direct to your bank, but through Consilium Wrap Amicus Investment clients can also shop around banks, and observe how term deposit rates differ across terms – click here for the latest term deposit schedule – currently the best rates over 1-3 years are:
- 1 yr 6.00% @ Heartland Bank
- 1.5 yrs 5.45% @ ANZ
- 2 yrs 5.35% @ SBS
- 3 yrs 5.20% @ Westpac
Consilium’s Term Deposit Schedule is refreshed monthly with another run due in early June – if you would like to receive this schedule via email each month, please click here to register for Amicus Term Deposit Update.
- Cash Funds (flexible and highest return – READ THIS):
A cash fund is a type of managed fund, where a fund manager such as Milford, Mercer, or Kernel invests your funds across a spread of New Zealand cash, short-dated debt securities, and term deposits. These managers effectively shop around for you, giving you diversified exposure across a range of cash or cash like investments – this diversified approach leads to less exposure to one counterparty (i.e. bank), but also allows for higher returns, in a more tax efficient format.
Milford’s Cash Fund is structured as a Portfolio Investment Entity (PIE), currently yielding 5.38% after fees. The top tax rate for a PIE is 28%, meaning a high earner with a 39% tax rate would need to get 6.50% in a savings account or term deposit to get the same after-tax return. These funds are also liquid – meaning you can access your funds within a few days without penalty – a very attractive place to hold cash.
On tax … (perspective, not tax advice)
As recently as July 2022 investors who had cash in the bank were paid less than 1.00% meaning for each $100,000 they were only earning $1,000 p.a. before tax. With such low returns, it was easy to overlook tax efficiency on cash, but with higher interest rates, tax matters.
When it comes to investing or holding cash, every dollar of return is considered ‘income’ which is 100% taxable under NZ law.
With interest rates now at 5-6% the same $100,000 of cash can generate $5,000 to $6,000 per year of income, and if you are aware of how you hold your cash, you can keep up to 12.5% more of that return each year (up to $750 per year).
The secret? A PIE wrapper. As mentioned above, a PIE wrapper attracts tax at a different rate to your traditional income tax rate and is capped at 28% while income taxes now max out at 39%.
But it isn’t just the top tax rate where a savings can be made. The below table is a simplified summary, highlighting that investors across the income spectrum can reduce their tax burden by understanding the difference in tax rates applied to PIE and non-PIE income – Click here to work out your PIE Tax rate.
Lazy money can make you money now – It is time to set the Simpsons ‘drinking bird’ aside.
Technology and the development of the managed funds industry has made it easier for Kiwi investors to shop around and get more out of each dollar (and even for businesses to have alternatives for their idle cash in the bank). As I mentioned in my note last week ‘Drive to Survive & Illusions of Riches’, with inflation running hot it is more important than ever to get the most out of each dollar we sit on.
The below continuum summarises the BEST returns on offer across the range of cash investments explored in this note:
With such great returns after tax available through Cash Funds, there is very little reason to dabble in the more traditional savings accounts, or term deposits (outside of strategically holding a term deposit ladder) – you get the best of both worlds, higher returns with flexibility. If you are committed to the more traditional approach of term deposits, it is worth looking at whether your bank offers term deposits in a PIE wrapper as these can create substantial tax savings depending on your situation.
Once again, if you have made it this far, thank you for tuning in and joining me through what was hopefully an eventful, if not educational, look through the options available for holding cash as a New Zealand investor.
That said… I appreciate not all are as interested as I am in the details. If you want to talk to your situation, why you are holding cash, and how you can make the most of that cash, please reach out to your adviser or book a call with one of our team below.
We are here to help.