Annuity 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.
“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 payouts
Annuities 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.)
Insurers 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 rates
Annuity 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.
Click here for the
original article.