Recently, a surge in retiring baby boomers and high interest rates has contributed to a significant increase in annuity sales. According to Limra, a leading global research organization for the insurance industry, annuity sales surpassed $1.1 trillion between 2022 and 2024. In 2023 alone, there was a 23 percent growth in annuity sales compared to the previous year. Overall, there has been a 70 percent rise in annuity sales since 2014, as reported by Limra.
Basic fixed annuities, offering a three-year guaranteed interest rate similar to a certificate of deposit (CD), are currently providing rates as high as 5.85 percent in January 2025, surpassing the top three-year CD rates at 4.65 percent. Additionally, payouts from immediate annuities resembling pensions have seen double-digit increases from pre-pandemic levels.
However, the outlook for annuities in 2025 is uncertain. Limra predicts a “mixed bag” for annuity sales. With potential interest rate cuts looming, straightforward fixed annuities, which are perceived as less complex than other options, may become less attractive due to declining rates. On the other hand, index-linked annuities could see an uptick in popularity as consumers aim to benefit from market growth.
These industry trends have implications for your annuity choices in 2025. Here’s a breakdown of how these trends are impacting the market and what you should consider if you are considering purchasing an annuity this year.
The recent surge in annuity sales can be attributed to various factors. In 2022, traditional stock and bond portfolios experienced a significant decline of 17.5 percent, prompting many soon-to-be or current retirees to seek the income security provided by annuities. The Federal Reserve’s interest rate hikes from March 2022 to July 2023, rising from 0.25 percent to 5.5 percent, allowed insurance companies to offer more favorable terms on fixed and fixed-index annuities.
Despite the stock market rebounding with a 24 percent gain in 2023, concerns about a potential recession kept annuities in the spotlight. Many investors were enticed by the opportunity to secure some of the highest annuity crediting and payout rates in nearly two decades.
Furthermore, the availability of annuities has increased with more banks offering these products, and the purchase process has been streamlined by insurance companies, making it easier for consumers to explore and buy annuities.
Looking ahead to 2025, while fixed annuities have been a driving force behind the recent growth in the annuity market, representing over 40 percent of sales in 2023, Limra anticipates a decline in the popularity of fixed annuities. Sales of fixed-rate deferred annuities are projected to decrease by 15 to 25 percent in 2025.
Fixed annuities continue to offer a reliable return of over 5 percent for conservative investors, unaffected by fluctuating market rates, making them a secure choice for those averse to risk. Unlike variable annuities with their associated fees and market-dependent payouts, fixed annuities provide a stable return without the need for sub-accounts or complex management. However, the appeal of fixed annuities is diminishing as other annuity products promise higher potential returns, albeit with more attached conditions.
For those new to annuities, understanding fees, commissions, and common terms is crucial. Fixed-index annuities (FIAs) have seen a surge in sales in recent years, offering principal protection and performance linked to market indexes like the S&P 500. While growth is limited during strong market years, FIAs provide a safety net against market downturns.
In 2025, as interest rates decrease, it is expected that cap rates for FIAs will also decline. It is essential for investors to carefully review FIA contracts, as they can be intricate and laden with terms that may impact returns. Some insurers are introducing hybrid indexes that combine various indexes, but caution is advised as these new indices may lack a proven track record.
When considering an FIA this year, opt for an annuity tied to a well-established index like the S&P 500 and ensure that all terms are clearly explained by the agent or advisor.
Credited to your account and the duration of the rate you can expect. Single premium immediate annuities in 2025 are more attractive due to higher interest rates compared to previous years. These annuities provide immediate payouts and usually require a substantial upfront payment. They offer guaranteed income for life or a specific number of years, making them useful tools in retirement planning. For instance, early retirees can opt for a SPIA with a period certain to bridge the gap until they start receiving Social Security benefits. While SPIAs are straightforward like fixed annuities, the income they generate becomes less appealing as rates decrease. Limra predicts a 10 percent reduction in income annuity sales in 2025. When shopping for a SPIA, it’s essential to compare quotes from various insurers to secure a competitive rate.
Variable annuities, once popular, saw a significant decline in sales in 2023 and are projected to remain stagnant in 2025. Unlike fixed annuities that offer downside protection or FIAs that provide safety with growth potential, variable annuities offer little protection from market losses unless additional riders are added at a cost. These products are complex, with a history of high fees and surrender charges. While they used to offer competitive riders before the 2008 financial crisis, insurers had to reprice them following the market collapse. Transparency and cost reduction efforts have been made in the industry, but variable annuities still face skepticism from consumers and financial advisors due to their past.
Registered index-linked annuities (RILAs) have emerged as an alternative to variable annuities, linking returns to a stock index while providing more exposure to market gains. The first RILA was introduced in 2010, filling the gap left by declining variable annuity sales. Investors considering a variable annuity in 2025 should proceed cautiously, as these products have been flagged for high costs, complexity, and aggressive sales tactics by regulatory bodies like the SEC and FINRA.
The annuity market has witnessed a significant shift in recent years, with Registered Index-Linked Annuities (RILAs) emerging as the new star players. In the fourth quarter of 2023, RILA sales surpassed those of variable annuities for the first time, a trend that continued in 2024 with RILA sales exceeding $62 billion. The appeal of RILAs lies in their ability to offer consumers higher caps on returns compared to fixed-index annuities, while charging minimal explicit fees, distinguishing them from variable annuities.
The attractive features of RILAs, such as the potential for higher returns with reduced fees, have garnered attention from investors. However, it is crucial for prospective buyers to understand the intricacies of these products before making investment decisions. Insurers are able to offer seemingly favorable terms on RILAs by generating revenue through alternative means, such as paying investors less than the returns earned on investments, as highlighted in a review conducted by the Securities and Exchange Commission (SEC).
Despite the apparent benefits of RILAs, there are important considerations to bear in mind. These annuities present a complex array of crediting methods that can complicate product comparisons for consumers. While the higher return caps are enticing, there are trade-offs involved, notably the increased risk exposure beyond a designated floor or buffer. This buffer shields the account from initial losses within a specified range, typically 10 to 20 percent, beyond which the investor bears the subsequent losses.
For instance, if the buffer is set at 10 percent and the market experiences a 5 percent decline, the account value remains unscathed. However, a 20 percent market drop, akin to the events of 2022, would see the buffer covering the initial 10 percent loss, with the remaining 10 percent impacting the account value negatively. Furthermore, the ability of issuers to alter contract terms, including fees and interest caps, poses additional considerations for investors, emphasizing the importance of carefully reviewing the contract details.
Similar to Fixed Index Annuities (FIAs), RILAs impose substantial surrender charges for early withdrawals, underscoring the need for long-term commitment to the annuity. The SEC advises holding the annuity until reaching the age of 59½ and limiting withdrawals to the end of each investment option’s term to avoid penalties. As the annuity landscape evolves, with declining interest rates affecting the appeal of fixed annuities, products like fixed-index annuities and RILAs are gaining prominence among investors seeking market protection and growth potential.
As investors navigate the annuity market in 2025, due diligence is paramount. Careful consideration of options from reputable annuity providers, prioritizing simplicity and transparency, will be essential in identifying the most suitable product. The evolving dynamics of the annuity sector underscore the importance of making informed decisions to align with individual financial goals and risk tolerance levels.
