But rising bond yields means bond prices will fall, hurting most bond funds, at least in the short run. “This could positively impact annuities,” says Pete Golden, chief sales and distribution officer at Equitable in New York City.

Moreover, annuities can provide benefits that bonds don’t, such as guaranteed income for life—“one of the main reasons financial professionals bring annuities to their clients,” says Bryan Pinsky, a president at AIG Life & Retirement in Woodland Hills, Calif.

“This ability to guarantee a lifetime stream of income, which bonds cannot do, is what makes annuities appealing to retirees worried about outliving their savings,” adds Andrew Melnyk, chief economist at the American Council of Life Insurers in Washington, D.C.

Annuity Riders
Besides guaranteed lifetime income, some annuities offer other add-ons—such as long-term-care insurance and death benefits. “The different types of contracts offer different benefits that bonds cannot,” says Michael Zmistowski at Financial Planning Advisors in Tampa, Fla.

In the new interest rate environment, annuity providers will no doubt keep innovating. “We need to see what new annuity products the insurance companies come up with,” observes Brett Bernstein, CEO and co-founder of XML Financial Group in Rockville, Md.

Mortality Pooling
Annuities have another advantage over bonds: Their payout rates aren’t based entirely on interest rates but also on mortality credits. Sometimes called mortality pooling, this is an actuarial calculation that weighs each annuitant’s life expectancy at the time of purchase.

“Annuities offer an income advantage over the bond alone for anyone over 70, through mortality credits,” says Jason Branning at Branning Wealth Management in Ridgeland, Miss.

It’s All In The Timing
Whatever happens, existing fixed annuities won’t change. Only newly issued contracts can reflect higher rates. “Because fixed annuities are contractual obligations with a life insurance company, their value doesn’t fluctuate,” says Kimberly Foss, president of Empyrion Wealth Management in Roseville, Calif.

Don’t expect other types of annuities to change too soon either. “It might take some time for the adjustments in [interest] rates to make their way into payout rates,” says James Regan, a partner at SharpePoint in Phoenix.

Annuity modifications will depend partly on how much and how quickly the Fed moves. “The pace of change is critical,” says Russell Hill, chairman of Halbert Hargrove in Long Beach, Calif.

Everything Is Relative
As of this writing, the Fed has announced a gradual tapering of bond purchases in concert with rate increases. “So far, the rise in rates is slight, not impacting products much yet and still way below what we have seen even in recent years,” says Larry Rybka, president and CEO of Valmark Financial Group in Akron, Ohio.

His colleague, Jacob Soinski, senior financial planner at Valmark, adds, “An investor in bond funds will generally experience some return lag in a rising interest rate environment, because newly issued bonds with higher rates will be more expensive than the fund’s existing bond holdings.”

That’s also good for annuities. “Annuities can often provide a greater benefit for long-term investors than buying bonds,” says Mike Harris, a senior education advisor at the Washington, D.C.-based Alliance for Lifetime Income.

Impossible To Predict
But one can never be sure how far the Fed will move. “It’s not all that clear how comfortable Federal Reserve chair Jerome Powell is with enacting less accommodative monetary policy,” says Joan Alexandre, an analyst at Kestra Financial in Austin, Texas.

David Blanchett, Lexington, Ky.-based head of retirement research at PGIM, the investment management group of Prudential, is similarly cautious. “There’s a very real possibility rates could fall again,” he says, “if we have a big negative market event.”  

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