There’s no doubt that high interest rates have made certain investments more attractive. For example, life annuities have become a lot cheaper than they were during the depths of a pandemic.
A life annuity is a fixed amount of annual income that an insurance company pays you for life. It may also include survivor benefits. For instance, a joint life annuity continues to be paid to your spouse if you die first. And a joint life annuity with a 10-year guarantee is paid to the beneficiaries of the estate for at least 10 years, even if both spouses die earlier.
The chart shows how much joint life annuity – with 10-year guarantee – a 65-year-old couple could have bought with $100,000 at various times since July, 2020. The amount payable has gone up by more than a third since November, 2020. The higher that interest rates go, the lower the price of an annuity. But this doesn’t necessarily mean that annuities are a great buy right now.
The big question is whether the Bank of Canada and the federal government can tame inflation. While the nominal amount you receive from the annuity doesn’t drop, inflation reduces the value of the payments in real terms.
Annuity holders can live with inflation at 2 per cent a year but will feel the pain if the inflation rate spikes again the way it did in 2022. On the other hand, both inflation and interest rates might drop from the current high levels in which case retirees may regret not buying an annuity now.