What To Consider When Comparing A CD Annuity With A Deferred Fixed Annuity
A CD annuity, or Certificate of Deposit, operates in a significantly different way from a standard annuity. To decide between the two, you will first need to define your objectives as clearly as possible. One of the most important considerations when choosing any annuity is safety. As annuities are low interest investment vehicles, they are a very poor risk if they are not completely safe. All annuities sold by reputable providers have a high degree of safety, but certificates of deposit are even safer. They are backed by the Government, who will return your money in the event of bank failure.
Although annuities are backed by very strong financial institutions, they are not the Government and they do fail. If you choose this type of investment, it is strongly recommended that you check out your provider as thoroughly as possible. Independent rating companies can give you a very accurate assessment of the relative strength of a provider. It is exceedingly rare for a highly rated company of this type to go to the wall, but it can and does happen.
One of the major determining factors when you buy an annuity is the length of time you are intending to invest for. This is also important in deciding between a CD annuity and a regular one. The CD annuity is generally more suitable for a shorter time frame, and can effectively be used for a goal such as the down payment to buy a home. As real estate has traditionally proven to be an excellent overall investment, this is one of the better uses for investment funds of this type.
If you are intending to save money to boost your retirement fund, you will be better advised to look at a long term deferred fixed annuity. This is the instrument which gives you the greatest control over interest rates, and indeed even guarantees the rate of interest in the initial stages of the investment. Because they are defined for this purpose, fixed annuities are more flexible when the funds are needed for living on during the later years of an investment.
The tax incentives also mitigate strongly against the CD annuity. With a certificate of deposit, tax is payable on any gains at the time those gains accrue. With the fixed annuity, the tax is deferred until the money is actually taken out of the investment. This makes a huge difference, as the money which would have gone in taxes is still available to be reinvested in further years of the annuity. When you consider compound interest, this makes a very large difference over the full term of the investment. It represents another major reason why deferred fixed annuities are best for the long term, and why only short term investors can really consider the CD annuity.
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