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David Blanchett and Michael Finke

Retirement Planning > Retirement Investing > Annuity Investing

Annuity Payout Rates Are on the Move

By David Blanchett By Michael Finke

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What You Need to Know

  • Multi-year guaranteed annuities (MYGAs) are a surprisingly appealing fixed income investment alternative.
  • Gains are taxed only when the annuity is cashed in, providing a net tax benefit for many near-retirees.
  • Variation in rates has spiked in the past few months, increasing the benefit of shopping around.

Fixed rate annuities, also called multi-year guaranteed annuities (MYGAs), are like CDs offered by insurance companies that are a surprisingly appealing fixed income investment alternative. MYGAs provide guaranteed returns similar to corporate bond yields (which are not the same as corporate bond returns).

Assets are protected by state guaranty funds, and gains are taxed only when the annuity is cashed in, providing a net tax benefit for near-retirees who expect their income tax rate to fall.

Unlike bonds, annuity rates are not set by trades through a market exchange. They are set by insurance companies. In a period where corporate bond yields rose 100 basis points between March 1 and May 20, insurance companies can finally begin increasing the benefits, or payout rates, of a variety of annuities.

Because insurance companies are slower to reprice than financial markets, it is possible that some jumped on the opportunity to increase rates faster than others.

MYGAs simply promise to provide a specific return on an initial investment at some future date. Variation in rates should be affected only by the expected returns on the insurance company’s portfolio of investments, sales expenses and profits. Differences in characteristics such as expected mortality will not explain variation in promised returns.

MYGA rates tend to vary both by term and financial strength. Higher payouts are typically offered by firms with lower financial strength, and MYGAs with longer time to maturity.

There has always been variation in the payout rate across providers when you control for term and financial strength rating. Insurance companies manage their assets and liabilities differently; therefore, it should be expected that some carriers will offer more attractive rates than others. 

If there is higher variation in rates, there is a bigger benefit to shopping around. If the payout rates are relatively tightly clustered, then the benefits to searching for the highest rate are likely less significant.

We’ve been exploring the potential benefits of MYGAs for over a year and a half and recently received data from Blueprint Income that includes daily payout rates for MYGAs available on their platform from Sept. 24, 2018 to May 19, 2022. 

This dataset provides us with an opportunity to better understand how insurance companies are responding to the rising rate environment. If we focus on five-year terms (the most common term available), we see that average rates across all providers have risen recently along with the rise in corporate bond yields, grouped by financial strength rating. 

MYGA payout rate chart 1 Charts via David Blanchett and Michael Finke

Perhaps even more striking is a notable increase in the variation in MYGA payouts recently. This effect is demonstrated in the next chart, which includes the standard deviation of payout rates among those with either A- or B++ AM Best Financial Strength Ratings.

We choose to focus on only these two rating groups because they have the most provider data available, increasing from five and seven providers at the beginning of the period, respectively, to seven and 17 providers at the end of the period, respectively. 

MYGA payout rate chart 2

The standard deviations for the payout rates for both groups are at the highest level recently that they’ve been over the entire course of the dataset. The spike in the variation across quotes suggests that it is incredibly important to shop around among MYGA providers to get the best possible rates.

This spread effect appears to be at play with other products, such as immediate annuities, an effect noted recently in another piece for ThinkAdvisor. We hope to explore this more in future research, but we think that it is especially important for investors and financial advisors to actively shop around today before purchasing an annuity to ensure they are getting the best possible rate.

David Blanchett is managing director and head of retirement research for PGIM DC solutions, an adjunct professor of wealth management at The American College of Financial Services, and a research fellow for the Retirement Income Institute.

Michael Finke is professor of wealth management at The American College of Financial Services.

David Blanchett

Michael Finke

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