The lowdown on Income Layering

The lowdown on Income Layering

10 October 2018 - posted in Investment Markets and Lifestyle and Pre-Retirees and Retirees by Sam Martin


Leading up to the Global Financial Crisis, strong share market returns (2002-2007) and the loss of favourable Centrelink assessment (5O% assessable in 2004 and 100% assessable in 2007) resulted in annuities falling out of favour.

Following the GFC, a combination of more innovative annuity products being available and the dramatic falls of many retiree’s investment portfolios have seen a turnaround in the popularity of annuity products. What appeals to many retirees is their ability to provide a guaranteed retirement income no matter how long they live or how markets perform.

The retirement strategy that uses annuity products is called income layering.  Using this strategy a retiree would aim to have their most basic living needs met with a combination of Centrelink’s Age Pension and a lifetime annuity. This is the first layer of income in the diagram below labelled ‘’essentials’’.

An additional layer is then built on top to provide for non-essential expenditure and desirables. Due to the more discretionary nature of these expenses a growth orientated investment structure can be used to provide higher returns over the long term. An Account Based Pension is an ideal product to provide the income for this layer as it offers a large choice of investment options in a flexible, tax free environment.

The top layer is for planned upcoming costs early in retirement such as holidays, car changeovers etc. This income is met by a term annuity as opposed to the lifetime annuity used in the 1st layer.

Income layering is increasing in popularity and uses a combination of market linked and annuity products to provide retirement income. 

As with all retirement investment strategies it will be made up of an allocation to both growth and defensive assets.

 With the help of your adviser you can determine what investments will make up the defensive allocation, and whether you prefer the use of an annuity type product or the use of cash, fixed interest and bonds.

The fundamental goal of almost all retirees is to invest and provide income through the many investment cycles which are likely to be seen over the average 25 years in retirement. It is unlikely that cash or an annuity alone will achieve this goal due to their low returning nature. Just as it is unlikely a 100% allocation to the share market would provide the security for lifelong retirement income.

If income layering is a strategy you would like to discuss further, your Goldsborough Adviser will be able to help.


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