You will find at least four things that may possibly influence the rate you receive on deferred annuities:
• Market interest rates on other fixed income securities
• Liquidity/funding needs of a particular annuity company
• Term of the annuity
• Other features of the contract (e.g. long surrender periods will usually be on contracts that offer higher rates)
Of the 4 items above, market interest rates probably possess the greatest impact on deferred annuity rates. As an example, the rate on a 10-year treasury note is currently 1.94% and that also influences the relatively low rate on a 10-year deferred annuity of 3.85%. The difference between deferred annuity rates and other fixed income investments is usually greatest when rates are falling or low. However, this also depends on the term of the specific deferred annuity and how often the rate changes.
As an example, deferred annuities that adjust rates once annually will be sensitive to market rates and adjust to them every 12 months. However, some annuity companies will be more sensitive to others based on how the invest their bond portfolio. Companies that have short term bond portfolios will closely track with changes in rates while those that have invested longer term will not adjust their annuity rates quickly, either up or down. Before you invest, you can get information on the annuity company portfolio. If you think rates in the economy will rise, opt for a company that has bonds maturing soon that can take advantage of higher rates. And also opt for a contract that adjusts the rate every 12 months.
If instead, you believe that rates will stay low or fall, then get a CD-type annuity that locks in your rate for several years.
Rate competition between fixed annuity companies can sometimes result in opportunities so that you can receive a higher return in your money, but you have to know what to look for. As an example, how safe is the company, what's the renewal rate history, what is the Moodys or S&P financial strength ranking, and what are the withdrawal options? Companies faced with a liquidity crunch (not necessary a long term problem) may enhance their rates on deferred annuities and run a "sale." During this 30 or 60-day period, you can lock in a rate that may be above the market rate. So shopping is in order as rates on deferred annuities could differ by more than 1% from one company to another. As deferred annuities guarantees are subject to the claims-paying ability of the annuity company, financial stability is very important to consider.
Next, consider the surrender charge schedule. The schedule has two components, the first being the level of surrender charges i.e. how high they are and the second being the length of the schedule i.e. for how many years there are surrender charges. Typically, annuities with higher charges for longer periods will pay you much better rates on their deferred annuities and vice versa. So if you can be patient and have a longer time arrives in you can find deferred annuities that pay more.