In a signal of confidence in the strength of the economy, the Federal Reserve raised interest rates in the middle of March to a range between 0.75% and 1%. This move is a sign that the economy is expected to continue to grow, albeit slowly, and that inflation is at an acceptable level of close to 2%.
As a result, experts say annuities brokers should be ready for greater interest from consumers who want to save. “An increase in interest rates will definitely increase the interest in annuities,” says Lou Cannataro, senior partner at Cannataro Park Avenue Financial. Investors are searching for safe ways to grow capital, he says, and many have reverted to high-dividend-paying stocks without giving proper analysis to the amount of risk in such portfolios.
Read on to learn more about what higher interest rates mean for the economy overall and annuities in particular.
Subdued Inflation — and Growth
Higher interest rates are good for saving but put a damper on borrowing and inflation, and that’s just what the Fed is going for. “The interest-rate hike will generally slow down the economy,” says Paul Koger, swing and positions trader at FoxyTrades. “This is a counter-measure to combat growing inflation.”
The Fed is expected to keep a close eye on the economy in the coming months as it aims to keep inflation under control. Slow, stepped increases in interest rates should keep inflation down without contracting the economy, Koger says. A new presidential administration with new fiscal policies and economic priorities could move the Fed to reassess its goals later in the year.
Crediting Rates Won’t Rise as Quickly
While rising interest rates can give savers hope for larger returns, a delay in higher rates being reflected in annuities could discourage some investors, experts say. “The biggest issue for current annuity owners in an increasing-interest-rate environment is their crediting rates will rise slower than the rest of the market,” says Dennis O’Keefe, a financial planner at Successful Money Strategies. Those who own fixed index annuities that were purchased in the past five years will see their participation rates stay the same while new policies issue at more profitable participation rates, he says.
“In any case, there will be a delay between rises in interest rates and increases in the annuity interest rate,” Cannataro says. Depending on how the economy performs in the coming months, the Fed has left its options open to raise rates again later this year.
Consumer Interest May Perk Up
Annuity brokers can expect to see more consumers exploring their options in annuities, experts say. Multi-year guarantee annuities, single premium immediate annuities, and deferred income annuities all expect to see higher payouts over time. Those who have annuitized their funds usually have fixed payments unchanged by interest rates. In addition, annuity periods can be stretched to keep existing customers solvent, Koger says.
Cannataro stresses that brokers need to take care to communicate clearly how a particular fund is calculated when it comes to payouts and how it responds to interest rates. As new customers express interest in annuities, brokers should help provide guidance and clarity.