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What's being suggested is a zero coupon bond that converts to a fixed maturity coupon bond after a specified number of years. I recently owned such a bond (and not for this purpose). So there's nothing novel in the product. What is novel is the pitch.
They acknowledge that "annuities do a good job taking out longevity risk." This product does not. They say it becomes like an "annuity paying a stable, secure income". But that's only for a fixed term, unlike an annuity that guarantees its higher stable secure income for life.
It's interesting that they pitch mortgages as being simple because payments are a "constant number that aggregates some interest and some principal." Yet annuities, perhaps because payments are also constant number that aggregates some interest and some principal "are [considered] opaque". (It's this combination of principal and interest that accounts for annuities' stream of higher payments than bonds.)
Or are annuities opaque because you don't know how the issuer raises the cash to make those payments? The issuer simply promises to make the payments. And that's different from bonds exactly how?
Annuities are not perfect products. They are designed to provide a higher rate of guaranteed income for life. These bonds, while more liquid, fall well short of doing that.
Comments
What's being suggested is a zero coupon bond that converts to a fixed maturity coupon bond after a specified number of years. I recently owned such a bond (and not for this purpose). So there's nothing novel in the product. What is novel is the pitch.
They acknowledge that "annuities do a good job taking out longevity risk." This product does not. They say it becomes like an "annuity paying a stable, secure income". But that's only for a fixed term, unlike an annuity that guarantees its higher stable secure income for life.
It's interesting that they pitch mortgages as being simple because payments are a "constant number that aggregates some interest and some principal." Yet annuities, perhaps because payments are also constant number that aggregates some interest and some principal "are [considered] opaque". (It's this combination of principal and interest that accounts for annuities' stream of higher payments than bonds.)
Or are annuities opaque because you don't know how the issuer raises the cash to make those payments? The issuer simply promises to make the payments. And that's different from bonds exactly how?
Annuities are not perfect products. They are designed to provide a higher rate of guaranteed income for life. These bonds, while more liquid, fall well short of doing that.