After remaining stagnant in the previous years, rates for fixed annuities rose steadily throughout 2022, 2023 and 2024. However, the landscape is changing. In 2025, annuity rates are expected to continue to decline, making fixed annuities less appealing.
However, other types of annuity products like variable annuities (VAs) and registered index-linked annuities (RILAs) will likely increase in popularity, according to LIMRA, a large trade organization that supports the insurance and financial industries.
If you’re in the market for annuities in 2025, it’s a good idea to shop around and compare all your options. Be sure to compare interest rates, fees and other important factors. Don’t forget to determine whether you’d be better off buying now or waiting.
Annuity Rate Increases Key Takeaways
- In response to lower rates set forth by the Federal Reserve, annuity rates are declining in 2025.
- Despite the lower rates, products such as variable annuities (VAs) and registered index-linked annuities (RILAs) are projected to become more attractive options.
- If you delay an annuity purchase in an attempt to wait for a higher rate, you may miss out on accumulation time.
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How Do Interest Rates Affect Annuity Rates?
When the Federal Reserve raises interest rates, the interest earned on bonds, which comprise most of many annuity insurers’ portfolios increase as well. Since the Fed’s rates impact bond returns and those bond returns affect annuity rates, they can provide an accurate indicator of whether annuity rates are likely to go up or down.
In 2022, 2023, and 2024, rising annuity rates have gone hand in hand with the Fed’s rate increases. However, during a meeting in December 2024, the Fed lowered the federal funds target range by 0.25% to between 4.25% and 4.50%. As a result, rates for fixed annuities, bonds, CDs and other related products are declining.
Fortunately, annuities, such as variable annuities (VAs) and registered index-linked annuities (RILAs) are less sensitive to the reduced rate environment. This is because their returns are correlated to how mutual funds perform, rather than the Fed’s target rates.
Annuity rates are at their highest point in close to two decades and they won’t stay there forever. While annuity rates tend to remain steadier than jumpy mortgage or CD rates, they will start to fall when the Federal Reserve begins cutting interest rates. As of today, September 2024 is considered to be the most likely time when a rate cutting cycle will begin and annuity rates will begin to drop from then on.
Stephen Kates, CFP®Principal Financial Analyst for Annuity.orgStephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.
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What’s the Cost of Waiting for Annuity Rates To Rise?
If you’re exploring annuity products to help you meet your retirement goals, it’s up to you to decide whether you should buy now or wait for interest rates to rise. To do so, consider the opportunity cost, which refers to value lost when you choose an alternate course of action.
By delaying an annuity purchase or another investment, you might miss out on the value of the foregone growth on those funds. Also, if the funds have the potential for exponential growth and deferred taxes, your loss may be even greater.
Future Uncertainty
Unfortunately, there is no crystal ball that will tell you if interest rates will rise in the future. After all, the Fed’s rate changes are designed to stabilize the economy, which we can’t predict either. Rates may increase, decrease, or remain the same for a short or long period of time. Due to the uncertainty of the future, waiting isn’t necessarily the smarter option.
Lost Time
With a deferred annuity, your payouts will begin after a certain period of time, instead of immediately. When you open one, you allow interest to compound and ultimately grow the value of your account. If you delay your purchase, you’ll miss out on the time your annuity could have accumulated that compound interest. Lost time equals lost returns.
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If you decide to play the waiting game, make sure that whatever you decide to do with that money instead is likely to grow faster than the annuity would have. Otherwise, delaying your purchase doesn’t make financial sense.
Real-World Example: What You Could Lose by Waiting
The annuity type as well as its interest crediting method will determine the potential loss you might face if you hold off on buying it and wait for interest rates to increase.
Imagine you’re interested in a multi-year guaranteed annuity (MYGA) with a lump-sum premium of $100,000 that guarantees a 2.4% interest rate for five years and would grow in value to $112,589.99 by maturity. If you wait a year to buy this type of annuity, you must secure a 3% interest rate to accumulate the same value by your target date.
Keep in mind that this example won’t apply to other types of annuities. Also, you have other options, such as parking your cash in a high-yield savings account for a year and purchasing an annuity with a higher premium.
For example, imagine depositing that same $100,000 into a high-yield savings account that offers 1.0% for one year. You would have an additional $1,000 after the year is up. If you then put the entire $101,000 into a four-year MYGA, you would need a lower 2.75% interest rate to accumulate $112,576.75 by your target date.
Editor Norah Layne contributed to this article.
