While superannuation has done its job in providing a low-tax environment to save for retirement, Austock Life is finding that more clients that have ordinary money invested are seeking other annuity-like structures to sit alongside their superannuation pension accounts or ordinary annuities to boost income and make the money last longer. Clients, or their financial planners, are structuring ‘annuity-like’ withdrawal streams from insurance bonds, invested in a variety of asset classes to boost annuity returns.
Annuities have limitations:
- Locked-in to a fixed rate, fixed payments and frequency
- No personal tax shelter
- Capital Guarantee can be costly – lower returns
- Inability to top up annuity (need to start a new one)
- Cannot access or break without penalty
- Longevity risk
An Insurance Bond ‘Annuity-like’ withdrawal stream allows flexibility:
- Variable payments – fully flexible
- Tax effective; lower effective rates – 30% offset
- Manage investment profile throughout the life of the bond
- Replace or introduce new annuitant(s) mid-stream
- Can be reversionary
- Can be deferred (post 10 years tax free)
- Lump sum access at any time or add more
- Tax-effective estate planning for residual amount
Layering an insurance bond withdrawal stream alongside an Capital Guaranteed annuity and/or an Account Based Pension can ‘supercharge’ the overall income stream whilst giving capital and income certainty to a portion of the overall portfolio (see diagram below).
For example:
A 65 year old with an inherited $650,000 in ordinary money is looking to structure an income of $40,000 per annum for 20 years. And still have some residual capital to either pass to his estate or continue to draw down. We will assume he has a Marginal Tax Rate (MTR) of 20%.
He places $400,000 in an ordinary annuity earning 2.5% (taxable) and paying $20,000 p.a. for 20 years. This gives him guaranteed income and capital.
He places $250,000 into an Austock Imputation Bond with a 20-year term and chooses to place 40% into a term deposit fund and 60% into a mainstream balanced fund. A relatively conservative portfolio, which has delivered a historical 5 year performance of 5.11% p.a. after fees and tax. He draws down $20,000 p.a.
After 20 years he has $164,533 remaining in the annuity and $43,750 in the bond. He can choose to continue the bond and even add to it at this point.
He has also gained an increasing tax credit from each withdrawal from the bond due to the 30% tax offset. This credit has resulted in no tax payable on the income from the bonds and reduced the tax burden on his other income.
