What are Indexed Annuity Bonds?
An indexed annuity bond (IAB) is a special class of annuities. Similar to other bonds, you pay an upfront principal and there are regular repayments over a specified term.
The regular repayments before maturity from Government bonds or CIBs (capital indexed bonds) are only interest repayments. With IABs, the regular repayments are part of the principal and also interest payment. In the absence of inflation, these repayment amounts are equal over the duration of the bond. This amount is referred to as the base annuity.
With inflation, each repayment is indexed by inflation over the bond’s duration.
- Investment is protected against inflation.
- Steady flow of income over bond duration
- Can be traded in the market
- Less exposure to rising interest rates (because more of your capital is returned faster)