Commodities

Climbing interest rates means good news for annuity buyers


G-stockstudio | Istock | Getty ImagesAnnuity rates are starting to increase after having bottomed out for most of the Covid-19 pandemic.That means buyers, who are generally retirees or those near retirement age, may find payouts better now than they were just a few months ago.The trend will likely continue if the Federal Reserve continues raising its benchmark interest rate, as it’s expected to do to tame high inflation, according to annuity experts.More from Personal Finance:Annuities could soon qualify as a default 401(k) investmentHow to sidestep a tax bomb when selling your homeHigh-yield bonds may lose appeal amid rising interest rates”If you looked at this three months or a year ago and weren’t jazzed about the payout rate, go out and look again,” said David Blanchett, head of retirement research at PGIM, the investment management arm of insurer Prudential Financial. “It’s more attractive.”Higher annuity payoutsAnnuities offer a guaranteed stream of monthly income, like Social Security and pensions.There are many types. At their core is a simple concept: The buyer hands over a pile of cash to an insurer, which pays regular income now or in the future for the rest of the buyer’s life.The average payouts from an immediate annuity increased by more than 11% for men and 13% for women since the beginning of 2022, according to CANNEX Financial Exchanges Limited. (The data is based on a 70-year-old man and 65-year-old woman who buy an immediate annuity with a $100,000 lump sum. The average is based on weekly quotes from the top-selling annuities.)If interest rates go up, it’s expected annuities will pay out more.Branislav Nikolicvice president of research at CANNEXInsurers offered the average man $616 a month at the end of April versus $553 a month at the start of the year, for example, according to CANNEX.”I think we’re back where we were prior to Covid,” said Branislav Nikolic, vice president of research at CANNEX. “If interest rates go up, it’s expected annuities will pay out more.”The trend appears even more pronounced with so-called longevity annuities, a type of deferred annuity that starts paying income later in life.Payouts have jumped 42% for both men and women since the start of the year, according to an annuity quote supplied by CANNEX. (The data is based on 65-year-old buyer who receives income starting at age 85, based on a $100,000 lump sum. To get historical quotes, CANNEX used data from one highly rated insurer that’s active in the market and which is representative of the overall industry trend, Nikolic said.)In dollar terms, a female buyer who bought the longevity annuity on May 1 would get about $2,925 a month starting at age 85 — nearly $900 more per month than the $2,054 income stream on Jan. 1, according to the data.Interest ratesAnnuity payouts are largely based on two key factors: mortality (or life expectancy) and interest rates, experts said.The Federal Reserve slashed interest rates to rock-bottom levels early in the pandemic to prop up the U.S. economy. But high inflation has led the central bank to raise rates at its two most recent meetings. More hikes are expected this year.Bonds are the lynchpin of insurers’ annuity portfolios. When interest rates rise, insurers get a higher yield on new bonds — which generally gets passed along to consumers in the form of a larger monthly check, according to Jeremy Alexander, CEO of Beacon Annuity Solutions.Some annuities (like multiyear guarantee annuities) act more like savings accounts that buyers can opt to turn into a monthly income stream at the end of their term.A five-year multiyear guaranteed annuity paid a 2.9% rate, on average, as of mid-May — almost 50% more than the 1.95% average at the end of 2021, according to Beacon data. (That rate is guaranteed in each of the five years.)”When you’re seeing a 50% increase in rates, that’s significant,” Alexander said.It’s not guaranteed that annuity rates will continue to rise, since it’s impossible to predict the course of the U.S. economy and whether Fed policy will respond as expected, Blanchett said.Consumers thinking of buying an annuity should shop around by getting quotes from different companies, which may vary widely from insurer to insurer, Blanchett said.It’s also important to look at an insurer’s respective financial strength rating, he added.These ratings — provided by firms like S&P Global Ratings, A.M. Best Company, Fitch Ratings or Moody’s — help gauge insurers’ ability to pay income in future years. Insurers with a low rating relative to competitors may offer a higher payout to entice customers.

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