But VAs typically offer optional “ living benefit ” riders for an extra fee , such as lifetime income guarantees . As interest rates rise , these benefits “ will likely start to become more generous ,” says Frank O ’ Connor , vice president of research at the Insured Retirement Institute in Washington , D . C .
Cap And Crediting Rates Other types of annuities may also pay more .
Fixed-indexed annuities , for example , reward account holders with a percentage of an index ’ s gains , in exchange for complete downside protection . Registered index-linked annuities ( also called RILAs ), are a type of VA that credits annuitants with a higher percentage of the underlying investment ’ s gains while providing a lesser degree of downside protection . Both are likely to increase the percentage of gains that can be credited to the account .
“ Higher interest rates are going to make annuities more attractive on an absolute basis ,” says David Blanchett , the Lexington , Ky . -based head of retirement research at PGIM , the investment management group of Prudential . “ That ’ s pretty unequivocal .”
Relative Attractiveness But income-producing annuities are relatively more attractive when interest rates are lower , Blanchett says , “ because annuities provide the benefits of longevity pooling .”
Longevity pooling refers to the mortality credits that tend to favor younger annuity holders . Annuity payout rates are only partly linked to interest rates ; they are also calculated using the age of each annuitant relative to other annuitants . Those who live longer end up receiving a higher yield — i . e ., more lifetime income .
“ Rising interest rates are the proverbial high tide that lifts all ships , improving all fixed-rate products ,” says Kalem Mackey , executive vice president of insurance distribution at C2P Enterprises in Westlake , Ohio . But only income annuities , he adds , offer mortality credits .
“ On a relative basis ,” says Wade Pfau , Dallas-based author of the Retirement Planning Guidebook and co-founder of the Retirement Income Style Awareness assessment tool , “ lifetime income provisions from annuities are more attractive when interest rates are low .”
Annuity Providers Have More Capital
Still , there ’ s no denying that annuities look noticeably more appealing right now . When interest rates move up , annuity providers have more capital on hand and can become more generous . That ’ s “ a good thing for the industry ,” says Brian Sward , executive vice president and head of product solutions at Franklin , Tenn . -based Jackson National Life Distributors , a unit of Jackson National Life Insurance Co .
Scott Gaul , head of individual retirement strategies at Newark , N . J . -based Prudential , agrees . “ As rates rise , financial services companies like Prudential are often able to enhance value for customers ,” he says , adding that annuities have advantages regardless of interest rates . Tax-deferred growth , for instance , is a benefit “ no matter what the economic environment ,” he says .
“ Higher interest rates are going to make annuities more attractive on an absolute basis .”
— David Blanchett
Indeed , annuities are “ a powerful tool for most people , given their unique ability to provide accumulation and / or income-for-life guarantees ,” says Dave Hanzlik , vice president for annuity and retirement solutions at CUNA Mutual Group in Madison , Wis . “ Interest-rate environments do not change these fundamental benefits .”
The Annuity Decision
There ’ s little question that the decision to buy an annuity “ can depend on the broader market environment , along with other factors , including an individual ’ s personal retirement goals ,” says Corey Walther , president of Allianz Life Financial Services in Minneapolis . Riskaverse individuals , in particular , can find these vehicles appealing .
Jared Nepa , vice president and national sales manager for annuities at Lincoln Financial Group in Radnor , Pa ., strikes a similar chord . “ Interest rates may affect the rates for certain annuity categories , but they have minor impact on the protection [ annuities ] can provide to an investor ’ s account value or income in retirement ,” he says .
In other words , if they are right for a particular client , interest rates shouldn ’ t matter . “ Annuities in general may be attractive to clients seeking specific benefits ,” says David Porro , director of insurance at Summit Risk Management in Parsippany , N . J . “ Higher interest rates may only magnify the impact of these benefits .”
To be sure , some experts point out that annuities “ are not investments but risk management tools ,” as Richard Anzelone , a partner at StrategicPoint Investment Advisors in Providence , R . I ., puts it .
Karl Wagner III , a partner and senior wealth advisor at Biondo Investment Advisors in Milford , Pa ., says annuities are “ simply a function of transferring risk . As rates rise , certain investments pose less risk and others more .”
Annuities also often have “ surrender charges ,” or fees for taking money out too soon . They may tie up funds for “ three to seven or more years [ and ] that can make gaining access to your money extremely expensive ,” cautions Robert Steinberg , founder and CEO of Blue Chip Partners in Farmington Hills , Mich .
Nevertheless , people likely will keep flocking to annuities this year to lock in the high payout rates . “ Rates today represent an opportunity to buy lifetime income at a lower price than we ’ ve seen in over a decade ,” says Michael Finke , professor of wealth management at the American College of Financial Services in King of Prussia Pa .
52 | FINANCIAL ADVISOR MAGAZINE | MARCH 2023 WWW . FA-MAG . COM