Amidst High Rates, Annuities Are Delivering For Investors

The annuity market is governed by time and interest rate changes. Right now might be a great time to take out an annuity — or change an existing annuity to a new one.

Ty J. Young, president of Ty J. Young Wealth Management, says interest rate fluctuations over the last year have altered the annuity landscape significantly.

“The environment that we are in from an interest rate standpoint has changed,” Young says. “We went from very low interest rates a year or two ago to dramatically higher interest rates now. When interest rates go up, that provides opportunity.”

How Annuities Work

Annuities have been investment vehicles for nearly two millennia. Today, annuities are commonly used for retirement savings. Policyholders contribute to annuities to guarantee that, in retirement, they’ll receive sustainable income via regular stipends with added interest.

The concept of annuities is, roughly speaking, the opposite of mortgages. When interest rates drop, a homeowner may seek to refinance their mortgage to take advantage of the rate decrease and save money.

With annuities, though, benefits to policyholders happen when interest rates rise. When that happens, annuity holders may want to shift to a higher-bearing annuity, the same way refinancing a mortgage works.

Suppose you’ve had a CD that you purchased with a 1% interest rate two years ago, and now there’s an opportunity to buy a CD with a 5% interest rate. In that case, Young advises that switching to the 5% CD would be advantageous as long as you don’t incur any financial losses.

People who acquired annuities within the last eight years did so during a period of lower interest rates. With the recent rise in interest rates, these individuals are now stuck with annuities that offer very low interest rates.

Substantial Rate Hikes Give Investors a Golden Opportunity

According to Young, the last year or so has been an especially active time for annuity interest rates. Before, many owners took out their annuities with fixed interest rates of 1% to 2%, with some maximum gains set as low as 1.5%.

“Now, you could get 5% fixed,” says Young, “or now you could get a maximum gain of 10%. That means you can capture the first 10% of what the stock market gains in a year, lock in that rate, and do this without fees or market risk. That is a big difference to go from 1.5% to 10%.”

Bonuses can increase annuity value substantially. A couple of years ago, annuity products offered bonuses adding up to as little as 4%. 

But now, companies may offer 10-year annuity products with one-time, upfront bonuses of 12% just for entering into the contract. Bonuses for performance or other incentives are also possible with certain brokers.

How Do Owners Change Annuities?

Annuity transfers are typically executed via IRA transfers or 1035 exchanges. Both options can be carried out without tax charges. While some transactions may incur service charges or costs, most of the best annuity products on the market are available with no fees.

To take advantage of recently raised interest rates, most annuity owners will need to extend the time they’ll draw off their annuity funds — for example, going from 10 years of payouts to 15 or 20. For that reason, it’s best to ensure that the annuity owner’s financial status is in appropriate shape to handle regular income levels.

New Market Rates Drive Annuity Curiosity

Right now, annuities are being offered with guaranteed 5% rates. Stock-driven annuities that track the S&P 500 are offering maximum gains of 10%. This is causing owners to consider switching their annuity structures.

Furthermore, no interest rates are set in stone. Market fluctuations may result in lower annuity interest rates in the future, which is why executing annuity transfers is something to consider right now.

For those reasons, working with a financial advisor specializing in — or, even better, is dedicated to — annuity transactions is prudent. A general advisor who works with several investment vehicles might not have the depth of familiarity necessary for annuities.