How Switching Annuities Can Pay Off

Your money should work for you, and if it’s sitting in an annuity with a low crediting rate, it’s not working as hard as it could. Many annuities are coming up for renewal soon, and owners will have the opportunity to transfer their funds into an annuity with a better yield. If you’re in this situation, there are a few important things to consider before switching annuities.

Why Switching Annuities Could Pay Off

Earning a good return on your money is important for everyone, but it’s especially critical if you’re a retiree living on a fixed income. You’re not working anymore so your money needs to last as long as possible.

When you bought an annuity, you made a wise decision to secure retirement income. However, even if you did your research and selected the best annuity available at the time, market conditions change. Interest rates may have been lower back then, meaning that fixed indexed annuities came with lower crediting rates. By switching to a new annuity, you may be able to lock in a higher crediting rate. This simple move could make a big difference in your retirement income.

Should Your Annuity Be Switched?

If you purchased a multi-year guaranteed annuity (MYGA) in the past few years, you may be nearing the end of your rate guarantee period, and a switch may be in your best interest.

This situation is impacting many annuity owners! Fixed-rate contracts sold in record amounts over the past three years as interest rates rose. It’s estimated that roughly $63.1 billion in fixed rate annuity contracts will reach the end of their term in 2025. Of these, roughly 71% were sold in 2022 with three-year contracts; roughly 25% were sold in 2020 with five-year contracts; and roughly 4% were sold in 2018 with seven-year contracts, according Life Annuity Specialist, citing LIMRA data.

What’s a Good Crediting Rate?

If you have an annuity, you may be wondering whether it’s a good crediting rate?

The simple answer is that a good crediting rate is the highest one you can secure – but that’s not quite the full story. Some annuity companies offer high rates that aren’t as good as they first appear. For example, they may come with excessive fees that chip away at your earnings, or the crediting rate may be based on simple rather than compound interest rates. As always, the devil is in the details.

Nevertheless, assuming all other things are equal, a higher crediting rate is better. Because annuity crediting rates are tied to economic factors and current interest rates, the best rates available will change over time. This means it’s hard to say what counts as a “good” crediting rate – it’s very relative. Depending on market conditions, a good rate for an annuity issued in one year could be a bad rate for one issued in another year.

Even a small increase can make a big difference. If you can switch from an annuity with a crediting rate of around 4% to one with a crediting rate of around 5%, with similar or better terms, you could receive a lot more in the long run. Exactly how much will depend on a few factors, including the annuity principal amount and how long you let it accumulate value before receiving payments. With a principal of $100,000, an annual crediting rate difference of just 1% amounts to $1,000. Over multiple years and with compounding interest, that difference can really add up.

In addition to the crediting rate on a fixed annuity, it is important to understand the minimum guaranteed crediting rate that the contract carries. This rate is the lowest crediting rate that a company can credit you for the life of the contract. Companies determine this rate in different ways, but it generally changes each calendar year and is typically between 1% and 3%. If you purchased an annuity in a low interest rate environment, you may discover that you can improve both the current crediting rate and the minimum guaranteed crediting rate by switching your policy.

Time Is of the Essence

When it comes to transferring your annuity, timing is everything.

• You need to consider the terms of your annuity contract. If you switch before a certain date, you may be subject to expensive surrender fees that negate many of the benefits you’d gain from switching.
• You need to act before interest rates plummet. When this will happen, exactly, is not certain. Investopedia says that the Federal reserve cut interest rates three times in 2024, and more rate reductions could lie ahead in 2025. This is good news if you’re planning to apply for a mortgage, but it’s bad news if you want the highest crediting rate on your annuity.

How to Switch Annuities

If you’re interested in switching annuities, take three steps.

1. Review your contract. Find out if there is a surrender period, or a period of time during which you cannot withdraw funds without incurring a penalty. By reading the fine print, you can avoid paying excessive fees by strategically timing your annuity switch.
2. Find a good deal. In addition to looking for a better interest rate, make sure you pay attention to the nitty gritty details of the annuity, including the fees, the way interest is calculated, and whether it’s a fixed or variable annuity.
3. Arrange for the transfer. Your new annuity provider may be able to assist with the annuity switching process, and in some cases, everything can be managed digitally.

Canvas offers simple annuities with competitive fixed crediting rates. We also make transferring your annuity a piece of cake with an easy digital rollover process. Could you get more with one of our annuities? Use the annuity calculator to find out.