It is interesting to understand that during the last three decades, interest rates on secure deposits have dramatically swung from as high as 14% to below 3%. This will make all predictions about the actions of future interest rates difficult. This can lead to the larger question - the best way to identify a secure investment that may fetch a steady assured income and can deferred annuities play a role.
One possible solution would be to spread the risks by choosing deferred annuities with varying maturity schedules (e.g. 3 years, 5 years, 10, years, 15 years) and commit your money over a broad spectrum of interest rates. It is common that fixed investments that are long-term produce a higher rate of interest. But the downside is that should interest rates rise, it will be tough to remove cash from long-term investments and buy new investments fetching larger returns. So, how do you successfully cope with interest rate fluctuations when they grow to be volatile?
A partial solution would be to consider Market Value Adjusted Deferred Annuities (MVA). By opting for the MVA, you can properly lock in the interest rates for many years, typically up to 10 years. After each term, the annuity company will offer fresh interest rates and allow you to withdraw the money without incurring surrender fees.
But in the event you want to harvest the money prior to term for what ever reasons, the annuity company will treat your deferred annuity like a bond. In other words, if interest rates have declined, your annuity will be credited with a gain should you want to remove your funds. So, it is possible to benefit from falling rates with an MVA. It is not possible to gain from increasing rates because, like a bond, the MVA will lose value if you want to redeem your account prior to term. The only way to take advantage of increasing rates is to use an annuity ladder as suggested in the 2nd paragraph above. As your short term annuities come to term, you will be able to renew them at a higher rate.
Like all fixed deferred annuities, an MVA is free from the sales loads and other operational deductions because the insurance company offers you a "net rate" so that what is quoted, is what you get. There are however surrender charges (i.e. early withdrawal penalties). Additionally, most contracts are likely include waiver of surrender charges for:
- confinement to a nursing home
- terminal illness