As interest rates begin to rise, many investors are questioning what this could mean for annuity products. Fixed annuities, in particular, are marketed as having an upside benefit of the market without the risky downside. What’s important to remember is that when returns are capped with these products, so when the market significantly rises, you aren’t likely to receive the entire benefit.
CEO of AnnuityAdvantage Ken Nuss discussed this and other ways that the rising interest rates could impact annuities in a recent Fox Business article.
When asked about how higher interest rates impact the value of annuities, Nuss explained that existing, already issued fixed-rate annuities are not impacted. The value of the annuity is set at the time of purchase, and the compounding interest rate is predetermined for a set period of time. This is contractually guaranteed by the insurance company who issues the annuity.
Nuss claimed that investors often ask if our current interest rate environment is the right time to buy an annuity. He explained that the problem with waiting for interest rates to rise is that no one knows when it will happen, how high they’ll go, or if they will be sustained. There are a lot better places to put your money than sitting in an extremely low interest bearing savings account, waiting for higher interest rates.
Income riders are also to be considered in a changing interest rate environment. An income rider is an optional benefit that can be purchased at the time of an annuity contract. They are designed to help generate a higher level of guaranteed lifetime income but can be influenced by interest rates.
“Generally speaking, the higher the interest rate an insurance company can earn on its underlying investment portfolio, typically high quality corporate and government bonds, the more generous it can be to policyholders with regard to its income rider roll-up rates and/or lifetime payout percentages,” Nuss added.
But those changes can take some time to trickle down to the company’s annuity offerings, and they are usually more incremental as opposed to dramatic.
Another question that is frequently asked, according to Nuss, is whether or not it’s a good idea to roll a 401k into an annuity. This question is not one that has a “one-size-fits-all” answer, and really depends on the goals and needs of the individual. In some cases this can be a good idea.
“Most people only consider a 401k rollover upon separation of service from their current employer as a result of a job change or retirement,” Nuss stated. “However, many 401k plans include a provision for in-service 401k rollovers upon attainment of a certain age, typically 59 ½. Individuals should refer to their 401k plan document or check with their plan administer to research options.”
Written by Rachel Summit