Rising interest rates have been blamed for rising inflation and a volatile stock market. But recent interest rate spikes have fueled interest in annuities. In 2022 alone, investors pumped more than $310 billion in annuities — exceeding the previous record (from 2008) by 17%.
Fixed-rate annuities are especially popular since they are based on national interest rates. The higher the current interest rate, the larger the potential payout.
Why Annuities Are Hot Right Now
Annuities are hot because interest rates have reached historic highs. Just two years ago, it wasn’t uncommon to find CDs available with interest rates of 1% to 1.5%.
Now, in 2023, you can purchase annuities of 5% or higher. The maximum gains on the S&P 500 stock market index are 10%. This means that your potential gains are anywhere from two to five times higher today than they were a year or so ago.
Why Investors Love Annuities
Think of it this way. In an economy where interest rates are dropping, it makes sense to refinance your home mortgage. Why? Because after refinancing, you can lock in a lower interest rate, which can save you thousands over the lifespan of your mortgage.
Conversely, when interest rates are rising, it makes sense to invest in an annuity that tracks with the rate hikes. Why? Because investing in a high-interest investment vehicle can help you gain greater returns over the lifespan of the investment.
Additionally, some annuity products offer a bonus from the day you purchase the investment. And this bonus is also higher today than it was just a year or two ago.
For example, if you purchased an annuity with a 10% bonus, then your $10,000 instantly becomes $11,000 from the day of your investment. It’s no wonder investors are flocking to annuities!
Can I Trade my Old Annuity for a New Annuity?
In the previous example, lower interest rates prompt homeowners to refinance their mortgages. But when interest rates are high, can you trade in your current annuity for a new one? Yes — you can change annuity products to take full advantage of higher interest rates.
How to Change Annuity Products
There are basically two ways to change annuity products. You can initiate an IRA transfer, which simply involves transferring money from your current IRA to a new account or even another financial vehicle altogether.
For non-IRA products, you can complete a 1035 tax-free exchange. The IRS will allow you to transfer funds from one investment vehicle (or a life insurance policy) to a new fund without incurring tax penalties.
Things to Consider Before Changing Annuities
Both of the above methods can be completed without incurring additional taxes. But before you change annuities, consider such questions as:
● Will my new annuity product extend my timeline? If so, by how much?
● Are there fees involved?
● Will my prospective gains outweigh these fees?
Make sure that your annuity vehicle ensures that you lock in a new, favorable fixed interest rate. Where possible, look for annuity products that offer bonuses, which present yet another strategy for growing your wealth.
If necessary, you may want to consult with an annuity expert or investment professional to determine your best course of action.
Are Annuities Right for Me?
The goal of annuities is to generate wealth without being subject to market fluctuations. With the recent rise in interest rates, it’s easy to see why investors would be excited about these products or be eager to trade their current annuities for new ones.
Annuities aren’t your only investment option, of course. But if you are looking for ways to tap into rising interest rates, annuities can be a great way to go.
