Annuity vs. CD: Which Is Better in 2025?

In 2025, both annuities and certificates of deposit (CDs) offer attractive, guaranteed returns, especially as interest rates are expected to drop soon. If you're looking for a safe, fixed return on your money, either one could fit the bill -- but they're different in several important ways.

So how do you decide? Here's a breakdown of how annuities and CDs compare in 2025.

First, an important note

We'll be looking at just one type of annuity: a fixed deferred annuity. These annuities are relatively simple and safe, and they're also fairly similar to CDs.

But keep in mind that there are many other types of annuities, and some are complex and risky. Be sure to do your research before purchasing any annuity.

What CDs and annuities have in common

• Safety: Both products are designed to protect your principal. You won't lose money if the stock market drops, for example.
• Fixed returns: Fixed annuities and CDs offer guaranteed interest rates for a set period.
• Fixed investment period: You agree to leave your principal untouched for a certain amount of time. If you withdraw money early, you'll likely pay a penalty.

But the similarities end there. Let's dig into the differences.

Certificates of deposit (CDs)

A CD is a type of savings account you open at a bank or credit union. You deposit money and agree to leave it untouched for a set term -- generally between three months and five years -- in exchange for a fixed interest rate.

Pros:

• Safe and FDIC insured (up to $250,000 per depositor, per institution)
• No fees or commissions
• Predictable returns
• Terms as short as a few months
• Low minimum deposits (often $1,000 or less)

Cons:

• Interest is taxed yearly, even if you don't touch it
• Returns are modest for long-term goals

Typical APY: Some of the best CDs offer APYs around 4.00% to 4.25%.

Fixed deferred annuities

A fixed deferred annuity is an insurance contract. You pay a "premium" (a lump sum of cash) to an insurance company. Then you earn a fixed APY for a set period of time, usually two to 10 years.

Once that growth period ends, you can either:

1. Withdraw your principal and earnings in one lump sum
2. Receive regular payments for a certain number of years or for the rest of your life

That second option is one of the biggest differences between CDs and annuities; CDs only allow lump-sum withdrawals. Many people use annuities as a source of steady income in retirement.

Pros:

• Tax-deferred growth: You don't pay taxes on interest until you withdraw it.
• Potential for lifetime income: You can "annuitize" the contract to create guaranteed income.
• You can customize your policy: Much like a home or auto insurance policy, an annuity can come with all kinds of riders. For example, you can guarantee that your future payments will go up if you become disabled or need long-term care. Of course, these extra features cost extra, too.

Cons:

• Not FDIC insured: Annuities are backed by state guarantee associations, so if your insurance company goes under, you should still get the money you're owed. However, the claims process can be long and difficult, whereas FDIC insurance payouts are typically fast and automatic.
• Longer surrender periods: You typically need to commit your money for at least two years.
• Complex terms and fees, especially once you start adding riders.
• Higher minimum investment: Fixed deferred annuities often require you to commit several thousand dollars.

Two key features to look for:

• Death benefit: With this benefit, if you pass away before your annuity has fully paid out, then your beneficiaries will receive the remainder. Without this benefit, the insurance company keeps any amount not yet paid.
• No sales commission: Some annuities charge high upfront sales commissions. Look for commission-free (a.k.a. "no-load") annuities.

Typical APY: Many top-rated insurers offer annuities with APYs of about 5.00% to 6.60%, depending on the term. That's higher than the rates that CDs pay now.

Which should you choose?

Choose a CD if:

• You want the simplest, safest option
• You plan to use the money within a few years
• You want to avoid complex contracts and fees

Choose a fixed annuity if:

• You're saving for retirement and want tax-deferred growth
• You're OK with tying up funds for two years or longer
• You might want to turn your investment into income later
• You're willing to do more homework (and paperwork) to earn a higher APY

Final thoughts

In 2025, both CDs and fixed annuities offer high APYs. Annuities tend to pay more, but they come with bigger commitments and more complex terms. They're best for retirement savers who want guaranteed income down the road.

CDs are simpler and better for short- or medium-term savings.

Either option can be a great way to earn cash and protect your savings from interest rate cuts and inflation.

If you're ready to grow your savings risk-free, click here to view our list of the best CD rates available now and open one today to get started.