Could Lower Interest Rates Hurt Annuities?

Conflicting forces are bearing down on annuities, according to Luis Hernandez, assistant vice president of Frost Brokerage Services, based in San Antonio.

A variety of types of annuities are gaining in popularity as baby boomers age and look for sources of lifetime income, but at the same time, sinking interest rates make some investors look elsewhere for returns, Hernandez said in an interview with Financial Advisor.

“It is important to call out that the Fed lowered interest rates three times in 2019,” he said. “Although they may keep rates unchanged in 2020, as interest rates decrease, so do the rates for annuities, just like CD yields. With lower rates, clients may seek other investment vehicles.”

However, annuities overall have gained popularity as baby boomers continue to age, Hernandez added. “It’s difficult to generalize all annuity products because of the different types of annuities available. That being said, sometimes annuity consumers aren’t solely focused on yields.”

Even with sinking interest rates, which the Federal Reserve Board may drop even lower in 2020, annuities still appeal to risk-averse investors who want to protect their principal. Sales of all types of annuities rose nearly 15% in 2018 over 2017, according to the Insurance Information Institute, with fixed-annuity sales far surpassing variable annuities. Totals for 2019 have not been compiled yet.

“Annuities can protect income streams against longevity risk associated with higher life expectancies,” Hernandez added. “As an insurance product, annuities provide the capability of providing benefits, such as protecting income streams that can last a lifetime.”

Recent legislation such as the SECURE Act has changed the way investors use annuities, allowing the products to be more easily used in employer-sponsored retirement plans. New annuity products have become less complex, and providers have consolidated, he added.

“It’s important to know how these changes may affect retirement plans,” said Hernandez. “Clients should talk with their advisors to discuss these potential changes and the effect they could have on the clients’ overall wealth management plans.”

“While annuities can serve as one tool for a retirement plan, an annuity alone should never be the whole plan or the single tool.”