Why Fixed Rate Annuities Pay More Than Bank CDs

Each has distinct pros and cons – be sure to compare before investing.

Fixed-rate annuities act much like bank certificates of deposit, but typically pay much higher rates than CDs of the same term.

How can insurers afford to do this? After all, banks and insurers pay a fixed rate. Before we answer that question, let’s cover the basics of how each works.

A very popular type of fixed annuity, the multi-year guaranteed annuity, pays a guaranteed rate of interest for a period of two to ten years. There are no selling fees. This is why they are often referred to as “CD type annuities”, but there are key differences between them and CDs.

Taxation, penalties and liquidity

One is taxation. As long as you reinvest the annuity interest and don’t withdraw it, you won’t pay income tax. Tax deferral allows your interest to accrue faster. When the guarantee period ends, you can renew for another term or reinvest the full amount in a new annuity through a 1035 exchange and continue to defer taxes.

CD interest is taxable each year when credited, even if not withdrawn.

CDs have early withdrawal penalties. The same goes for fixed annuities. Withdrawals greater than those permitted by the contract before the end of the redemption period will incur an early redemption charge. However, many fixed rate annuities allow you to withdraw up to 10% of the value annually without penalty; some are more restrictive.

With most CDs or annuities, if you choose to receive interest payments instead of reinvesting them, you will not be penalized.

If you receive interest from your pension before age 59½, you will owe the IRS a 10% penalty on the accrued interest income you withdrew plus ordinary income tax. So don’t buy a fixed annuity if you need to. the silver before 59½. The IRS will waive the penalty if you are permanently disabled.

Unlike CDs, fixed annuities are not FDIC insured, but are covered by state guarantee associations, which provide some protection up to certain limits. Additionally, annuity issuers have good track records and economists consider annuities to be safe, especially if you choose a highly rated insurer.

Fixed rate annuities offer terms of two to 10 years. CDs are generally available with terms ranging from one month to five years. A few banks offer terms of up to 10 years.

Annuity rate Dwarf CD rate

As of mid-November 2021, you can earn up to 3.15% per year on a five-year fixed annuity. The highest five-year CD rate was 1.25%, according to Bankrate.

Fixed annuities also outperform CDs at shorter terms, and terms of up to 10 years are available. See this table of annuity rates.

Why can insurers safely afford to pay more? Much depends on what insurers and banks can invest in.

Why insurers can pay more

Banks make their money primarily on loans: mortgages, business loans, and personal loans such as car loans. Interest rates on most loans are low these days. In addition, banks have to absorb significant overheads and defaults. They don’t have much left to pass on to CD buyers.

Fixed annuities are backed by the general account of the insurance company. Life insurers invest in a mix of corporate and government bonds, stocks, mortgages, real estate and policy loans. These investments are often longer term and can offer higher returns than bank loans.

Insurers are primarily regulated by states. The federal government is the main banking regulator. These different regulatory systems can give insurers advantages in terms of cost structure, risk tolerance and investment flexibility.

Consider all options for guaranteed rates

If you’re looking to get a guaranteed interest rate, don’t automatically jump into a bank CD – or a fixed annuity for that matter. CDs and fixed annuities each have their pros and cons, and because of the penalties on annuities pre-59½ withdrawals, annuities are generally more appropriate for people in their 50s and older.

But annuities have two distinct advantages over CDs: tax deferral and generally higher guaranteed interest rates. Today, it’s easy to shop and compare CDs and fixed annuities online.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed rate, indexed and lifetime income annuities. He is a nationally recognized annuity expert and author. A free rate comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com/annuity-rates-quotes/multi-year-guarantee-annuities or by calling (800 ) 239-0356.

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