In a reversal of recent trends, LIMRA predicts a decline in fixed annuity sales and an increase in variable annuity sales in 2025.

Fixed annuity sales typically track changes in interest rates, said John Carroll, senior vice president and head of life and annuities at the Windsor, Conn.-based industry data tracker, speaking in a webinar on Tuesday about the group’s forecasts. As interest rates started coming down in 2024, he added, sales already started declining.

LIMRA projects that the Federal Reserve will cut interest rates by another 50 basis points in 2025, said Bryan Hodgens, senior vice president and head of LIMRA research. Consequently, he expects fixed annuity sales to drop anywhere from 6% to 15% in 2025, depending on the type of fixed annuity.

At the same time, he added, the stock market is likely to continue rising, which will fuel sales of variable annuities. He anticipates a bump in VA sales of up to 3% in 2025.

“Things are changing,” he said.

Fixed annuities pay a contractually guaranteed amount for a specific period. The payout rates are most directly linked to interest rates. Variable annuities, on the other hand, invest in mutual-fund-like subaccounts that rise and fall with the stock and bond markets. (Subaccounts that invest in bonds are more directly impacted by interest rates.)

In recent years, one of the best-selling types of variable annuity is the registered index-linked annuity (RILA), said Hodgens. Unlike traditional variable annuities, RILAs only credit annuitants with a percentage of the underlying investment’s gains. But they also limit how much can be lost if the investment loses value. Annuitants can choose in advance the degree of upside potential and downside protection.

Sales of registered index-linked annuities have grown every year since they were introduced in 2011, said Hodgens. “The RILA product has really taken off,” he added. “We’ve actually seen seven additional companies coming into this market in 2024. So new products are coming in.”

Other factors that could influence annuity sales in the year ahead include the record number of Americans turning 65, which Carroll said is the average age of annuity holders. “That’s a huge tailwind that could help this business,” he said.

One benefit of annuities is their ability to provide guaranteed retirement income—a sort of personal pension plan—which explains their popularity for that age demographic, he said.

Another factor is that the first generation of those who bought multiyear guaranteed annuities are coming out of the “surrender period,” Hodgens said, referring to the minimum amount of time that an annuity holder must hold the annuity. Multiyear guaranteed annuities are fixed annuities that offer a guaranteed fixed payout rate for a specific number of years. In return for that locked-in rate, the annuitant must hold the annuity until maturity, or at least for a certain number of years, or face a penalty. Since the first of these annuities was introduced in 2018, he explained, the seven-year “surrender period” for the first generation of holders will come due in 2025, meaning they will be free to take that money out.

“Where does that money go?” said Hodgens. “We’re estimating that roughly $70 billion will be coming out of surrender in 2025.”

Carroll said that will be a big issue going forward. “Most of the money, you hope, will stay in the annuity world,” he said.

“That’s something we’ll be keeping an eye on,” said Hodgens.