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May 13, 2022 at 09:21 AM
What You Need to Know
- Annuity payouts can be affected by bond yields and therefore as interest rates have increased, so has the payout rate for a variety of annuity strategies.
- Quotes from annuity providers show the spread between the best and worst payout have increased notably as interest rates have risen.
- It’s important to ensure the annuity product or strategy is competitive given the widening dispersion in payout rates among products.
It’s been a pretty wild ride for the markets in 2022. Equities and bonds are down so far for the year, and inflation is up (way up on a relative historical basis) — creating a challenging environment for investors.
I’ve spoken with quite a few investors and financial advisors over the last few years and a common hesitancy to purchasing an annuity has been the relatively low bond yield environment.
Annuity payouts, especially those with relatively long durations (think younger annuitants) can be significantly impacted by bond yields. Thus, as interest rates have increased, so too has the payout rate for a variety of annuity strategies.
While it will take some time for some of the more complex products to have more attractive payouts (think strategies with a protected or guaranteed lifetime income benefit), annuities that have simpler payout structures, such as immediate annuities (if you want income) and fixed rate annuities (or multi-year guaranteed annuities, MYGAs, if you are focused on a guaranteed return) are going to be more rate responsive and likely to have payouts that have increased recently.
One thing I have noticed, though, looking at actual quotes from various annuity providers, is the spread between the best and worst payout have increased notably as interest rates have increased.
In other words, certain providers are being more responsive to the interest rate increase than others.
How It Works
For example, I obtained payout rates for a life-only immediate annuity for a 65-year-old male from CANNEX on May 12. The highest payout rate was 6.563% for a $100,000 premium (i.e., it would generate $6,563 per year for life) while the lowest payout rate was 5.383%.
This is a difference of roughly 22%, which is especially notable and wider spread than what I’m used to seeing, which has been closer to 10% historically.
