Traditional Variable Annuities
The sales of traditional variable annuities rebounded last year. These products are linked to mutual-fund-like subaccounts, without upside caps or downside buffers. In 2021, they brought in nearly $87 billion, an increase of 16% from the preceding year. That increase ended a nine-year streak of declining sales.

Presumably, they were bought by folks who are bullish about the market but didn’t want to buy mutual funds outright. Instead, they likely sought the tax deferment that annuities provide.

“Many purchasers find this [tax deferment] attractive,” says Kimberly Foss, founder and president of Empyrion Wealth Management in Roseville, Calif. She adds that a rising interest rate environment like the one we have now tends to have a negative impact on equity prices—which could, in turn, have a dampening effect on variable annuity sales going forward.

Interest Rates
On the other hand, rising interest rates will cause many fixed annuities to pay out more. In this way, interest rates can “play a role in deciding if an annuity fits [a client’s] needs,” says Christopher Van Buren of LVW Advisors in Pittsford, N.Y. “Many fixed annuities had higher yields than a 10-year Treasury bond in the past couple of years.”

“Fixed annuity rates tend to follow rising rates,” confirms Jason Branning of Branning Wealth Management in Ridgeland, Miss. “In fact, commission-free fixed annuities that offer multiyear guarantees now offer annual rates of 3% to 4% for five years,” which means their yields “have risen faster than bond yields or CDs,” he says.

Multiyear Guaranteed Annuities
Clients who are risk averse tend to see rising interest rates as “a huge buying opportunity,” says Brian Bailey, a vice president at Financial Independence Group in Cornelius, N.C. “Many of those folks have been experiencing low interest rates in bank CDs for years.”

Bailey calls it a “psychological trigger.” For example, when rates move above, say, 3%, more clients start buying multiyear guaranteed annuities, or MYGAs. These are fixed annuities with a guaranteed fixed payout rate for a set period of years.

Frank O’Connor, vice president of research at the Insured Retirement Institute in Washington, D.C., suggests a strategy of staggering annuities of different durations. “In a rising interest rate environment,” he says, “laddering annuities may be a more effective strategy.”

Mortality Pooling
Annuities designed for income over one’s lifetime, not just a set number of years, typically calculate rates differently. They are “primarily driven from a pricing standpoint by your life expectancy … at the time you start the payments,” says Stan Haithcock, a Las Vegas-based author and agent focused on annuities who is the founder of the firm The Annuity Man. That is, their contractual guarantees are based not just on current interest rates but also on “mortality credits” (sometimes called “mortality pooling”) that relate to the annuitant’s life expectancy.

Mortality credits can make lifetime annuities a better bargain than equivalent bonds or CDs. That’s especially true when interest rates are low. “For those seeking to fund retirement expenses, lower interest rates make a more compelling case for the relative performance of annuities,” says Wade Pfau, professor of retirement income at the American College of Financial Services in King of Prussia, Pa., and author of the Retirement Planning Guidebook.

Yet even as interest rates increase, Pfau says, “annuities can still fund lifetime spending goals more cheaply than bonds.”

Beyond Interest Rates
Still, the dynamics of annuity sales are complex. Suzanne Norman, an education fellow at the Washington, D.C.-based Alliance for Lifetime Income’s Retirement Income Institute, says, “A variety of converging trends are attracting more Americans to annuities.”

Among them may be the variety of optional riders available. For instance, given today’s high inflation, “an annuity that also offers the option of a cost-of-living adjustment that can offset inflation can be extremely helpful,” she says.

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