Insurance bonds are rising in prominence as a way of addressing retirement income shortfalls, according to Austock Life.
The bond issuer's research found retirees are increasingly looking for savings and investment vehicles outside superannuation to ensure a stable post-retirement income stream, but that traditional annuities weren't making the cut by themselves.
This was because of several limitations that Austock Life said are inherent to the product: fixed-rate lock-ins, costly capital guarantees and the ongoing issue of longevity risk.
Austock Life argues that layering the annuity stream with an insurance bond provides numerous benefits, including variable payments, a flexible investment profile and ad-hoc access to lump sums.
To illustrate, Austock Life used the case study of a 65-year-old with a $650,000 inheritance looking for a 20-year income stream of $40,000 per annum. The first $400,000 was put into an annuity earning 2.5% and paying $20,000 for 20 years. The remainder was then invested into an imputation bond, 40% through a term deposit fund and 60% in a mainstream balanced fund; this mix, Austock Life said, had delivered a historical performance of 5.11% per annum after fees and tax.
Drawing down $20,000 a year from the imputation bond would leave the retiree with $164,533 in the annuity and $43,750 in the bond after 20 years; and because of the increasing tax credit from bond withdrawals the retiree would not have paid any tax on the income.
Austock Life explained: "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."