After bottoming out most of the COVID-19 pandemic period, annuity rates are beginning to rise. As a result, buyers-typically retired or close to retiring-might find that payouts are better now than they were a few months ago. According to annuity experts, the trend will probably persist if the Federal Reserve keeps raising its benchmark interest rate, as it is anticipated to control high inflation. “Try again if you weren’t satisfied with the payout rate when you looked at this three or twelve months ago,” said David Blanchett, Head of Retirement Research at PGIM, Prudential Financial’s investment management arm. “It’s more appealing.” Increased Annuity Payouts Like Social Security and pensions, an annuity can provide a steady monthly income for life. There are numerous types. The basic idea behind them is straightforward: in exchange for a lump sum of money, the buyer gives it to an insurer, who then makes regular payments to the buyer for the rest of their life. As reported by CANNEX Financial Exchanges Limited, the average payouts from an immediate annuity have increased by more than 11% for men and 13% for women since the beginning of 2022. (The numbers are based on a man who is 70 years old and a woman who is 65 years old who buy an immediate annuity with a lump sum of $100,000. The average is calculated using weekly quotes from the most popular annuities.) According to CANNEX, insurers offered the average man $616 per month at the end of April, compared to $553 per month at the beginning of the year. “I think we’re back where we were before COVID,” said Branislav Nikolic, Vice President of Research at CANNEX. It is assumed that annuity payouts will increase if interest rates do. The pattern seems to be even more pronounced with longevity annuities, which are a subtype of deferred annuities that begin paying income at a later stage in one’s life. According to a quote from CANNEX regarding annuities, payouts have increased by 42% for both men and women since the beginning of the year (The numbers are based on a buyer aged 65 who invests a lump sum of $100,000 and begins receiving payments at age 85.) According to data, a female buyer who purchased the longevity annuity on May 1 would receive approximately $2,925 per month beginning at age 85-nearly $900 more per month than the $2,054 income stream on January 1. Interest Rates According to experts, annuity payouts are largely determined by two key factors: mortality (or life expectancy) and interest rates. To support the U.S. economy early in the pandemic, the Federal Reserve slashed interest rates to near-zero levels. However, high inflation has prompted the central bank to raise interest rates at its two most recent meetings. Inflation is predicted to rise even further this year. Insurers’ annuity portfolios typically center around bonds. According to Jeremy Alexander, Chief Executive Officer of Beacon Annuity Solutions, when interest rates rise, insurers receive a higher yield on new bonds, typically passed on to consumers through a larger monthly payment. Some annuities (such as multiyear guarantee annuities) function more like savings accounts, from which purchasers can choose to withdraw a regular income after a set period. As of mid-May, a five-year multiyear guaranteed annuity paid an average rate of 2.9%. This was almost 50% more than the average rate of 1.95% at the end of 2021 (This rate is guaranteed for the entire five-year period.) “Seeing a 50% increase in rates is significant,” Alexander explained. “It’s not certain that annuity rates will keep going up since it’s impossible to know how the U.S. economy will develop or if the Fed’s policies will work as expected,” Blanchett explained. Blanchett recommended that consumers who are interested in purchasing an annuity do their research by requesting quotes from multiple companies. It’s also important to consider an insurer’s financial strength rating. These ratings, which companies like S&P Global Ratings, A.M. Best Company, Fitch Ratings, and Moody’s give, help figure out whether or not an insurance company will be able to pay out money in the future. If an insurance company has a low rating compared to its competitors, it might offer a higher payout to attract customers.
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