“ When the Federal Reserve lowers interest rates , the effective rates on fixed annuities will also decrease ,” says Janet Fox , president of ACH Investment Group in Raleigh , N . C ., and an LPL financial advisor . “ As a matter of fact , we have seen some fixed annuity rates start to decrease with the anticipation of a decrease by the Federal Reserve .”

The central bank is widely expected to begin easing rates at its meeting later this month , with most of the speculation centering on whether the decrease will be a quarter or half a percentage point .

Unlike other types of annuities , Fox says , fixed annuities offer a payout rate that ’ s closely tied to predominant interest rates . They are contractually guaranteed to provide a certain preset rate for a specific period of time . Many fixed annuities hold the rate for only three , five or seven years , however . Clients with one of these products may not feel any change immediately , she says . When the contract term is up , though , renewals will likely offer lower payouts , as will brand new issues .

Moreover , she notes , Fed rate cuts may extend into next year . “ If the Federal Reserve continues to decrease rates , the rates of newly issued annuities will be lower than the current rates ,” she says .

The pain of interest-rate cuts won ’ t be felt equally by all annuity holders . “ The impact will vary ,” says Teodor Panaitisor , assistant research director at Windsor , Conn . -based

“ FIAs have a strong value proposition for investors looking for principal protection and growth opportunities , and we don ’ t expect that to be impacted by interest rate cuts .”

— David Wood , Lincoln Financial industry-data tracker LIMRA . Lifetime annuities — whether single-premium immediate annuities ( SPIAs ) or deferred-income annuities ( DIAs )— lock in a rate when the contract is signed , he says . That won ’ t change .

Still , new fixed annuities might not be as attractive as those that were contracted when rates were higher , which will be reflected in a sales slump . “ As interest rates decline , it is likely sales will pull back ,” Panaitisor says .

A possible exception is the fixed-index annuity ( FIA ), advisors say . This provides income linked to the performance of an underlying index , such as the S & P 500 . A fixed-index annuity offers complete protection from market declines in exchange for a cap on upside potential . Interest rate cuts might cause annuity providers to lower the cap rates on these products , or adjust the spread ( the percentage subtracted from index gains before the interest is credited to the account ), analysts say , but FIAs could remain popular with clients who want market exposure without the risk of losing their investment .

“ FIAs have a strong value proposition for investors looking for principal protection and growth opportunities , and we don ’ t expect that to be impacted by interest rate cuts ,” says David Wood , a vice president at Lincoln Financial in Greensboro , N . C . If anything , he says , lower payouts for regular fixed annuities might cause more clients to pivot to FIAs . “ We expect the FIA market to continue to grow ,” he says .

Overall , many industry watchers say they aren ’ t particularly worried . “ Although decreases in interest rates can lead to lower fixed annuity rates , changes in industry sales are also dependent on the current market environment and the relative value of these products in comparison to other available solutions ,” says Scott Gaul , head of individual retirement strategies at Prudential Financial in Shelton , Conn . “ For example , if a period of lower interest rates coincides with heightened equity market volatility and uncertainty , some risk-averse clients may still value the

12 | FINANCIAL ADVISOR MAGAZINE | OCTOBER 2024 WWW . FA-MAG . COM