Want to lock in high rates? Look to annuities more than GICs right now

The bond market has outdone stocks for excitement lately, but you won’t hear much about it.

Bonds usually bow to stocks in day-to-day drama and influence in gauging what’s happening in financial markets. But the volatility lately in the bond market has been next-level. It’s a reflection of continuing uncertainty about the stickiness of inflation and prospect for central banks to lower interest rates.

The bond market deserves attention because it helps drive returns for guaranteed investment certificates and annuities, both of which remain at high levels compared to previous decades.

Bond yields set the trend for GIC rates and payouts from annuities, which are insurance contracts where a lump sum of money is exchanged for a lifelong flow of monthly income.

Interest rates in the bond market hit a recent peak last fall, fell hard and then moved a little bit higher again. Lately, they’ve been moving up and down. The net effect of all this in GIC-land is that four- and five-year returns have almost entirely fallen below 5 per cent. You might be able to get to that level through a deposit broker, but expect a requirement to invest a large amount, say $100,000.

Five per cent returns or more for a one-year term are still plentiful, but there’s not much scope any longer for using GICs to lock in high rates for a longer period. Annuities are a different matter.

If $100,000 were used to buy an annuity today, a top annual payout for a 65-year-old male would be $6,938, up 3 per cent from last month. For a 65-year-old woman, the annual payout has risen 3.8 per cent to $6,534. These examples were supplied by insurance adviser Rino Racanelli, who said annuity rates are almost back to the peak of last year. His quotes apply to registered annuities with a 10-year guarantee. That means you or your beneficiary would receive payouts for 10 years, even if you died sooner.

Annuities are not suitable for all your retirement funds because you can’t withdraw money or cash out once you’ve started receiving income. But annuities are a way to add some pension-like certainty to your retirement income and, today, lock in interest rates that will very likely decline later this year.