Negatives on Fixed-Rate Annuities Vs. Bank CDs

Build some guarantees into your retirement investments.

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People looking for guaranteed investment returns may find fixed-rate annuities and bank certificates of deposit (CDs) appealing. Fixed-rate annuities are investment contracts issued by insurance companies offering long-term guaranteed fixed rates of return. Bank CDs offer guaranteed returns with a choice of terms typically ranging from one to five years. Depending on your situation, the features of fixed-rate annuities may seem less attractive to you than bank CDs.


Although you make contributions with after-tax dollars, investment earnings inside a fixed-rate annuity are tax-deferred until you make withdrawals. Withdrawals are made first from investment earnings and as such attract taxation at ordinary income rates. In addition, any withdrawal made before you reach the age of 59 ½ attracts a penalty tax of 10 percent on top of the tax payable on the withdrawal. This penalty tax encourages you to keep your annuity funds for the long term and therefore you lose liquidity. Bank CDs offer greater liquidity as you can purchase them in short-duration terms such as five years or less. Your funds mature sooner and provide access to your money more easily. Withdrawing money from a bank CD before maturity, however, can result in a hefty penalty.


Fixed-rate annuities may be subject to various administration fees imposed by the insurance company. You may pay a percentage of your contribution called a front-end load when you make a deposit. Your account may be deducted a percentage of the value of the assets on a regular basis. You may be subject to a contract fee payable at regular intervals such as monthly or annually. You may also have to pay transaction fees anytime you wish to make a change to your contract. Bank CDs typically come with no fees. You earn the stated rate of interest for the given time period and at maturity you may receive the funds in cash or reinvest your money in a new CD at a new term.

Deposit Insurance

Bank CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor, per bank and per account category in the event that a bank becomes insolvent or declares bankruptcy. Fixed-rate annuities are insurance contracts and therefore do not receive FDIC insurance protection. Protection against insurance company insolvency is provided by your state’s life and health insurance guarantee association, although the protection amount for annuities in most states is limited to $100,000.

Surrender Charges

Withdrawals from fixed-rate annuities may be subject to surrender charges imposed by the insurance company. Although these charges typically last for a specific period of time and eventually drop off, they may reduce your liquidity in the same manner as would a tax penalty for early withdrawal.