CDs vs Annuities: Pros, Cons, and Who Each Is Best For

When comparing annuities vs CDs, the core distinction is how each generates income and manages risk.

CDs are bank-issued time deposits with fixed interest rates and insured principal, while annuities are insurance contracts designed to provide predictable income, often for retirement.

This article covers:

• How do annuities differ from CDs?
• What is the biggest disadvantage of an annuity vs CD?
• Is an annuity a safe investment?
• Are CDs considered safe investments?
• Why are annuity rates so high?

Key Takeaways:

• CDs offer principal protection and guaranteed interest but limited growth potential.
• Annuities provide higher income and longevity protection but rely on insurer strength.
• Annuities carry fees and limited liquidity; CDs are simple and liquid after maturity.
• Many investors use both as part of a balanced, income-focused strategy.

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The information in this article is for general guidance only. It does not constitute financial, legal, or tax advice, and is not a recommendation or solicitation to invest. Some facts may have changed since the time of writing.

What is the difference between a CD and an annuity?

The main difference between a certificate of deposit (CD) and an annuity is that a CD guarantees interest on a fixed deposit, while an annuity provides a stream of payments that can last for life.

A CD is a bank product where you deposit a fixed amount for a set period in exchange for guaranteed interest.

Your principal is typically insured up to regulatory limits (e.g., FDIC in the US).

An annuity, in contrast, is an insurance contract that converts a lump sum into a stream of payments, either immediately or at a future date.

Payments can continue for a fixed term or for life.

Unlike CDs, annuities are not insured by the FDIC, and their guarantees depend on the financial strength of the insurer.

Why do annuities pay more than CDs?

Annuities pay more than CDs because they take on additional risks and invest in higher-yield assets to provide guaranteed income.

• The insurance company assumes longevity risk, meaning payments continue even if the investor lives longer than expected.
• Investment portfolios backing annuities often include higher-yield assets than the ultra-safe, low-return assets typically used to fund CDs.
• Annuities may have longer investment horizons, allowing insurers to generate higher returns and pass some of that to the annuitant.

Are CDs better than annuities?

CDs are better for short-term or flexible savings needs, while annuities are better for long-term income planning.

CDs work well for investors who want a simple place to park money for a defined period or maintain funds for near-term goals.

Annuities are more appropriate when the objective is to convert savings into a predictable income stream, particularly later in life.

The better option depends on whether the goal is temporary cash management or long-term income structuring, rather than overall safety.

Are annuities safer than CDs?

Advantages of annuities

• Annuities can deliver higher income payouts, particularly over longer horizons.
• They can guarantee income for life or for a defined period.
• Annuities help manage the risk of outliving savings.

Disadvantages of annuities

• Access to principal is restricted, especially during surrender periods.
• Fees and contract features can reduce net returns.
• Guarantees depend on the insurer’s financial strength rather than government-backed insurance.

Should I get an annuity or a CD?

Choose a CD if your priority is preserving cash for a known future use, and choose an annuity if your priority is turning savings into sustained income later in life.

You should consider:

• Time alignment: CDs work best when funds are earmarked for a specific date, while annuities are designed to convert assets into long-duration payouts.
• Cash-flow structure: Annuities create scheduled income, whereas CDs function as holding vehicles rather than income engines.
• Risk trade-offs: CDs limit downside but cap upside, while annuities accept insurer exposure in exchange for income stability.
• Portfolio role: Many investors pair CDs as short-term stabilizers with annuities as long-term income foundations.

Conclusion

Annuities and CDs are often compared as if one must replace the other, but they serve different roles in how money behaves over time.

CDs keep capital intact and available, while annuities reshape capital into income with a defined purpose.

The more useful question is not which is better, but where certainty matters most at the point of deposit, or at the point of payout.

When chosen deliberately, each can reduce a different kind of financial stress rather than compete for the same role.

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Adam is an internationally recognised author on financial matters with over 830million answer views on Quora, a widely sold book on Amazon, and a contributor on Forbes.