As the number and size of SMSFs continue to grow, demand for indexed annuity bonds (IABs) is expected to be driven by an enduring low-interest and high-volatility environment.
FIIG Securities national manager of adviser services Simon Michell says that given these factors, SMSFs are likely to be largely responsible for “skyrocketing” IAB demand.
“SMSFs are expected to be one of the major drivers for IAB growth. A demand for more certainty of performance, a need to focus on income in a low-growth environment as well as interest rates at all-time lows is forcing SMSF investors to choose between taking on more risk for a higher return or adjusting their lifestyle down to meet the lower market returns,” Mr Michell told SMSF Adviser.
Given that IABs are a long-dated, low-risk type investment, they are particularly attractive to SMSFs in a ‘lower for longer’ environment.
“By using bonds, investors know what they will get and when they get it via the regular interest payments and fixed maturity date of the bonds. In addition, an annuity bond will pay investors their capital over the life of the bond instead of at the fixed maturity date,” Mr Michell said.
“By using your capital over the life of the bond you receive a quarterly payment of both interest and capital, increasing the quarterly income flow generated from your investment.”
Australian demand for annuity bonds over the next 12 months could potentially reflect the US where sales for similar products recorded a 30 per cent increase to US$16.2 billion last year.
“Many retirees have seen dividends cut, capital eroded and market performance not meeting inflation and the impact of having to adjust their lifestyle accordingly. 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.
This would be concurrent with Investment Trends research which showed that more than 60 per cent of advisers intend to suggest annuities to their clients this year, up around 20 per cent on last year.
“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,” Mr Michell said.
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