How Interest Rates Affect Annuities
Find out why higher interest rates benefit some annuities more than others.


Annuities base their returns on market interest rates. Given that rates were recently at their highest level since 2001, conditions over-all are favorable for buying an annuity. But higher rates benefit some products more than others.
Here, we look at how higher interest rates impact different types of annuities.
Fixed index annuities
Fixed annuities are paying higher guaranteed rates to match current market conditions. Fixed index annuities have also become a better deal. Many now offer higher possible caps for your returns as insurers are earning more.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The interest rate environment doesn’t matter as much for variable annuities, as the returns depend on the performance of the mutual funds they invest in rather than rates.
Initial bonuses
Many annuities also pay initial bonuses as a percentage of your deposit that can be worth 10% or more.
“If someone bought an annuity years ago when rates were low, it could make sense to break a contract to get the better rates. A bonus would help offset the surrender charge,” says Mindy Oglesby, a certified financial planner and CEO of Oglesby Wealth Strategies in Watkinsville, Ga.
How old is the annuity holder?
High interest rates could help you earn more if you’re looking for income, but it depends on your age. “It matters much more the younger you are,” says David Blanchett, head of retirement research for PGIM DC Solutions, the investment management division of Prudential.
If you’re 55, the amount of your payout is based on the insurer investing the money for the long term. High interest rates can help you lock in higher lifetime income. If you’re 85, high interest rates don’t matter as much. “At this point, payouts are mainly based on life expectancy.”
The possibility of rate cuts
Interest rates could fall later this year, although higher-than-expected inflation in early 2024 may delay rate cuts from the Federal Reserve. The possibility of declining rates provides extra incentive to purchase some types of annuities sooner than later.
But before you pull the trigger, make sure an annuity is appropriate for your long-term financial goals. If you cancel an annuity early, surrender charges could wipe out any benefit you gain by purchasing it when interest rates are high.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
Related content
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

David is a financial freelance writer based out of Delaware. He specializes in making investing, insurance and retirement planning understandable. He has been published in Kiplinger, Forbes and U.S. News, and also writes for clients like American Express, LendingTree and Prudential. He is currently Treasurer for the Financial Writers Society.
Before becoming a writer, David was an insurance salesman and registered representative for New York Life. During that time, he passed both the Series 6 and CFP exams. David graduated from McGill University with degrees in Economics and Finance where he was also captain of the varsity tennis team.
-
Stock Market Today: Stocks Stable as Inflation, Tariff Fears Ebb
Constructive trade war talks and improving consumer expectations are a healthy combination for financial markets.
-
What Trump’s 'Big Beautiful Bill' Means for Your Utility Bills
If passed, the 'Big Beautiful Bill' could make home energy upgrades more expensive and raise monthly costs. Here's how much more you might pay and how to prepare.
-
Over 50 and Still Paying Student Loans? Here's Some Help
It's the club no one wants to join. But if you are over 50 and still paying student loans, there are ways to tackle both debt and retirement savings.
-
Eight Estate Planning Steps to Protect Your Loved Ones (and Your Legacy)
Two-thirds of Americans don't have an estate plan. If you're one of them, these are the essential steps to take now to prevent problems for your family later.
-
AI Is Missing the Wisdom of Older Adults
AI will increasingly affect your healthcare and finances, but young workers are primarily designing the systems and getting most of the jobs.
-
A Financial Adviser's Guide to Solving Your Retirement Puzzle: Five Key Pieces
If retirement's a puzzle you're struggling with, try answering these five questions. The answers will guide you toward a solution.
-
Baby Boomers vs Gen X: Who Spends More?
Baby Boomers and Gen X are guilty of spending a lot of money. Here's a look at where their money goes.
-
You're Close to Retirement and Cashed Out: How Do You Get Back In?
If you've been scared into an all-cash position, it's wise to consider reinvesting your money in the markets. Here's how a financial planner recommends you can get back in the saddle.
-
Should You Ditch Your Medicare Advantage Plan? Most People Do
If you want to switch your Medicare Advantage plan or enroll in original Medicare, you're not alone. Here's when it's a good idea and how to go about it.
-
The 401(k) Mistake That Could Cost You Millions in Retirement Savings
Thinking about reducing your 401(K) contributions in the current market? Here are six reasons why you may want to reconsider.