Sales of indexed annuity bonds (IABs) are expected to grow strongly over the next 12 months as the reality of low interest rates and high volatility drives investors to the asset class’ relatively stability and security, according to FIIG Securities.

FIIG Securities National Manager of Adviser Services Simon Michell said local demand for indexed annuity bonds could mirror the strong increases experienced for similar products in the US over the last 12 months as investors adjust to the reality that interest rates are likely to go lower, and stay lower for longer.

According to LIMRA Secure Retirement Institute’s Second Quarter U.S. Annuity Sales survey, fixed indexed annuity bond sales in the United States were US$16.2 billion, 30 percent higher than the prior year and surpassing prior quarterly sales records.

In the first half of the year, indexed annuity bond sales increased 32 percent to US$31.9 billion, compared with the first six months of 2015. The Institute expects indexed annuity sales to exceed US$60 billion by the end of the year.

Domestically, research by Investment Trends earlier this year showed more than 60 per cent of advisers intend to suggest annuities to their clients this year, up from last year’s 41 per cent.

Mr Michell said falling interest rates and the poor performance of traditional asset classes had many advisers wondering how they can achieve a satisfactory return for their clients without taking on additional risk.

“Many retirees have seen dividends cut, capital eroded and market performance not meeting inflation and the impact of having to adjust their lifestyle accordingly,” he said. “In this environment inflation indexed annuity bonds will become more and more popular and we would expect to see a strong uptick in demand,” Mr Michell said.

“Longevity risk is something that financial planners are increasingly considering as pensioners’ life expectancy rises. To plan for the long term requires expert financial planning and the inclusion of long term solutions including indexed annuity bonds, which can offer higher-than-expected payout levels,” he said.

An IAB is a security predominantly issued by Public Private Partnership infrastructure projects with a revenue stream from a State or Commonwealth government. They are long dated, low risk investments. The investor receives a stream of cashflows made up of principal and interest. These payments are indexed to Consumer Price Index (CPI) such that the spending power of each one is at least as great as the payment before.

In nominal terms, if CPI growth is zero or negative the next payment is equal to the last just like an ordinary annuity; if CPI growth is positive the next payment is larger than the last.

Mr Michell said IABs were issued with a pre-determined capital repayment schedule for the life of the bond.

IABs allow investors to put their capital to work in order to increase the level of income generated with a high level of certainty and thus decrease the need to adjust their lifestyle to the performance of the markets.

“This allows investors to be able to forward project their cashflows and make plans, such as paying school fees or travelling, with a high degree of certainty.

Like all bonds, an IAB is a security that can be bought and sold in the secondary market. This provides a high level of flexibility to investors as they can purchase an annuity with a remaining maturity period to meet particular needs. As you receive your capital over the life of the annuity there is no final face value payment on maturity.

The chart below shows some IAB options for retail investors.

  Maturity date Projected yield to maturity*  

Minimum face value

Annual cashflow
Australian National University 07/10/2029 4.55% $100,000 $7,954
JEM NSW Schools 28/02/2031 5.16% $100,000 $7,612
JEM (Southbank) 28/06/2035 5.68% $100,000 $7,392
Novacare 15/04/2033 5.24% $100,000 $7,415
Civic Nexus Finance 15/09/2032 5.21% $100,000 $8,250
        $38,623

Note: Prices accurate as at 5 October but subject to change 
* Yield assumes inflation at the RBA board target mid point of 2.5%p.a.

Source: FIIG

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