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Swapping Old Annuities For New Ones
Interest rates have risen to a point where annuity swapping needs to be carefully considered by advisors .
By Ben Mattlin
NOT LONG AGO , JASON BRANNING ENcountered a client holding a oneyear-old fixed-rate annuity with guaranteed income for five years . Branning , a certified financial planner at Branning Wealth Management in Ridgeland , Miss ., ended up recommending that the client trade in the annuity for a newer model .
Why ? Because higher interest rates mean newer annuities will pay more , and the crediting rate , or guaranteed payout , was going to be higher in this case . “ Even though the surrender fee was a high percentage ,” Branning recalls , “ the client would be $ 10,000 better off … because of the significantly higher crediting rate .” Branning isn ’ t the only one asking clients to consider exchanging annuities .
Annuity swapping “ can make a lot of sense right now ,” says David Lau , founder and CEO of DPL Financial Partners , an RIA consultant network in Louisville , Ky ., that specializes in low-cost , commission-free annuities .
Tempting , But Not Always Wise
However , there are many caveats and exceptions for clients who want to go down this road . “ Care needs to be taken to review individual situations ,” Lau says , adding that it isn ’ t always a wise strategy .
“ Many fixed annuities will renew into the higher current rates automatically , so a new policy may not be necessary to benefit from today ’ s higher rates ,” adds Lau .
Different Types Of Annuities Are Affected Differently
Not all annuities benefit from higher interest rates in the same way . Fixed annuities , which pay a set amount over a specified time period , are most directly tied to prevailing interest rates . When rates go up , their payouts go up .
Variable annuities ( VAs ), which invest in mutual-fund-like subaccounts that rise and fall with the stock market , can also become more generous as rates rise . Their optional “ living benefit ” riders , such as lifetime income guarantees ( offered for an extra fee ), typically pay more when rates are higher .
In addition , many fixed-indexed annuities ( FIAs ), which reward annuity holders with a percentage of an index ’ s gains in exchange for complete downside protection , tend to enjoy increased gains on an account when interest rates go up . So do registered index-linked annuities , also known as RILAs ( variable annuities that credit a higher percentage of investment gains while providing a degree of downside protection ).
Clients have other products that have helped them lock in higher rates as well , including longer-term multiyear guaranteed annuities , or MYGAs . “ The majority of MYGA sales were predominantly in guarantee periods of five years or less ,”
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