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Rising interest rates are expected to lead to a renewed interest in annuities as advisors prepare to make guaranteed income products a more common addition to retirement planning conversations.
Demand for annuities has already grown during the COVID-19 pandemic as part of a broader flight to safety among older investors, according to data from the Secure Retirement Institute (SRI). Specifically, annuity sales in Canada were up by 21 per cent in the fourth quarter of 2021 from a year earlier.
Yet, with looming higher interest rates set to provide insurers with the ability to offer larger payouts on their annuity products, combined with an increasing number of baby boomers hitting retirement age, advisors are bracing for the demand for annuities to accelerate further.
“It is a very favourable environment for annuities, and I am anticipating a rise in that type of business,” says Joseph Trozzo, vice president of investment sales at Equitable Life of Canada in Vaughan, Ont. “With the transfer of wealth that’s going to be happening over the next five to 10 years and more baby boomers retiring, I think this product is going to become even more important for Canadians.”
While interest rates are not the only factor that determines the demand for annuities, they are a critical “piece of the pie” that has challenged insurers over the past two years, says Todd Giesing, vice president of annuities research at SRI in Windsor, Conn.
“Seeing rising interest rates is going to provide some relief. We do see a pretty strong correlation between interest rates [and annuities demand],” Mr. Giesing says, noting fixed-rate deferred products do especially well in a rising rate environment.
“Early in the pandemic, it was a flight to safety,” he says, “people didn’t care what the rates were, more so they were looking for that principal protection.”
Naunidh Singh Hunjan, chartered life underwriter and president at Hunjan Financial Group Inc. in Mississauga, adds that pandemic-related market uncertainty over the past two years has led more clients to be concerned about potentially running out of money in the latter years of their lives.
He says roughly 20 to 25 per cent of his client base have annuity products in their portfolios. Once interest rates start to rise, he expects that number to rise to “around 35 per cent, easily.”
Mr. Hunjan says he is planning to bring up annuities earlier and more often in his retirement planning conversations with clients, especially because “insurance companies also tend not to market [their products] as much, so a lot of people just don’t know about annuities.”
“Even in my practice, a lot of my older clients didn’t know they existed until I brought them up,” he adds.
The problem with trying to time interest rate hikes
For Mr. Trozzo, his only concern is that Canadians might want to continue to wait for interest rates to go up before buying an annuity product.
“Trying to time the market can be a very dangerous game and we can never really be sure about what’s going to happen with interest rates,” he says.
History suggests his concern is well-founded.
Mr. Giesing says consumer behaviour in the past has been driven by how quickly interest rates are going to rise.
“If people think the grass is going to be even greener six months from now and their situation warrants that they can wait, they likely will in those scenarios,” he says. “That means we may see rates rise as we are [about to start] seeing now, but that doesn’t truly correlate to the demand [for annuities] right away.”
For Mr. Hunjan, that’s already a reality despite the fact interest rates have yet to start rising.
“I’ve had clients tell me they want to wait and let interest rates rise a bit more or to a certain level, but I never recommend that,” Mr. Hunjan says. “I [tell them] it is always the right time if it fits your situation because if you waited to try and time the rates you also have to factor in the payments that you have missed if you bought now unless you’re buying a deferred product.”
For clients holding off on buying annuities in hopes of higher rates, Mr. Hunjan says he talks to them about a “layering” approach as a compromise.
“Somebody might have $300,000 and I would recommend they buy $100,000 now, another $100,000 one year later, and then reassess one year after that,” he says. “Just don’t wait to put all of it in at once trying to time the market.”
The question of now versus later as demand for annuities grows ultimately comes down to multiple factors, including the client’s age, the options they might want to add and the number of years they want their payments to be guaranteed.
“But that’s really where the value of the advisor comes into play,” Mr. Giesing says. “They’re the ones assessing those risks, determining the clients’ situation and their needs and then making the best choices that they can.”
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