Rising interest rates lift interest in annuities

Clients approaching retirement are increasingly interested in directing at least part of their savings to purchasing an annuity, says a financial advisor.

“I have had more questions about annuities in the last six months, I would say, than probably [over] my career,” said Jason Heath, managing director of Objective Financial Partners Inc. in Markham, Ont.

However, some clients get cold feet when they realize that buying an annuity means handing over a significant sum in return for the guarantee of periodic lifetime payments, Heath said.

Yet “the same people who might be jealous of retiree with a pension would never think of giving their money away to an insurance company to buy what is effectively a pension of their own,” he said.

Over the previous three decades of low interest rates, clients largely spurned annuities, which offered relatively meagre payouts. However, as the Bank of Canada, as well as other central banks globally, began hiking rates in the spring of 2022 in response to rising inflation, client interest in annuities began to increase.

As of February 2023, the monthly payout on a single-life annuity with a premium of $100,000 and a 10-year guarantee were up more than 20% compared to a year before.

Heath said he’s met with clients who see annuities as an attractive alternative to determining the appropriate amount to draw down from retirement savings for expenses, or to managing their own retirement investments.

“With Canadian bonds down double digits [last year], conservative investors who lost double digits on their bond portfolio are maybe thinking more about annuities as a true guarantee of fixed income as opposed to bonds, which do have some interest-rate risk,” Heath said.

Clients interested in annuities typically only direct a portion of their retirement assets to the purchase of a regular payout, Heath said.

To address client concerns about dying before reaping the benefits of the annuity, insurance companies offer guarantee periods, such as five or 10 years. They also may offer joint annuities rather than single-life annuities, where the life expectancies of both spouses factor into the payout.

However, the key benefit of “buying an annuity is not so much about protecting against the risk of dying young, it’s protecting against the risk of living a long life. [It’s] longevity insurance,” Heath said.

Rudy Mezzetta

Rudy is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on tax, estate planning, industry news and more since 2005. Reach him at rudy@newcom.ca.