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Rising interest rates mean good news for annuity buyers

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Rising interest rates mean good news for annuity buyers

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Annuity rates begin to rise after much of the Covid-19 pandemic has bottomed out.

This means that buyers who are usually retirees or people close to retirement age may find payments better than they were just a few months ago.

According to annuity experts, this trend will continue if the Federal Reserve continues to raise the base interest rate, which is expected to curb high inflation.

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“If you looked at it three months or a year ago and weren’t thrilled with the payout rate, come out and take another look,” said David Blanchett, head of pension research at PGIM, Prudential Financial’s investment management unit. – It’s more attractive.

Higher annuity payments

An annuity offers a guaranteed flow of monthly income, such as social security and pensions.

There are many types. They are based on a simple concept: the buyer transfers a bunch of cash to the insurer, who pays regular income now or in the future for the rest of the buyer’s life.

Average payments from immediate annuities since the beginning of 2022 have increased by more than 11% for men and 13% for women, according to CANNEX Financial Exchanges Limited. (Data is based on a 70-year-old man and a 65-year-old woman buying an immediate annuity with a one-time $ 100,000 annuity. The average is based on weekly quotes of best-selling annuities.)

As interest rates rise, the annuity is expected to pay more.

Bronislaw Nikolic

vice president of research at CANNEX

In late April, insurers offered the average man $ 616 a month against $ 553 earlier this year, according to CANNEX.

“I think we’re back to where we were before Covid,” said Bronislaw Nikolic, vice president of research at CANNEX. “If interest rates rise, the annuity is expected to pay more.”

This trend is even more pronounced with so-called longevity annuities, a type of deferred annuity that begins to pay income later in life.

Payments have jumped 42% for both men and women since the beginning of the year, according to an annuity quote provided by CANNEX. (Data based on a 65-year-old buyer who has been earning income since age 85, based on a lump sum of $ 100,000. To obtain historical quotes, CANNEX used data from one highly rated insurer operating in the market and representing The general trend of the industry, said Nikolic.)

In dollar terms, a female buyer who purchased an annuity for May 1 longevity would receive about $ 2,925 a month starting at age 85 – nearly $ 900 more per month than the $ 2,054 income on January 1, according to the data.

Interest rates

Annuity payments are mainly based on two key factors: mortality (or life expectancy) and interest rates, experts say.

The Federal Reserve cut interest rates to a minimum at the start of the pandemic to support the U.S. economy. But high inflation has forced the central bank to raise rates in the last two meetings. More hikes are expected this year.

Bonds are the basis of annuity portfolios of insurers. According to Jeremy Alexander, CEO of Beacon Annuity Solutions, when interest rates rise, insurers get higher yields on new bonds – which are usually passed on to consumers in the form of a larger monthly check.

Some annuities (such as multi-year warranty annuities) act more like savings accounts, which buyers can turn into a monthly income stream at the end of their term.

The five-year multi-year guaranteed annuity is paid at an average rate of 2.9% as of mid-May – nearly 50% more than the average of 1.95% at the end of 2021, according to Beacon. (This rate is guaranteed every five years.)

“If you see a 50% increase in rates, it’s significant,” said Alexander.

It is not guaranteed that annuity rates will continue to rise as it is impossible to predict the course of the U.S. economy and whether Fed policy will respond as expected, Blanchett said.

Consumers who are thinking about buying an annuity should go shopping, getting quotes from different companies that can vary greatly from insurer to insurer, Blanchett said.

It is also important to look at the appropriate rating of the financial stability of the insurer, he added.

These ratings, provided by firms such as S&P Global Ratings, AM Best Company, Fitch Ratings or Moody’s, help assess insurers ’ability to pay income in future years. Insurers with lower ratings compared to competitors may offer higher payouts to attract customers.

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