A variable annuity is a form of annuity that provides consistently timed payments to the annuity holder in potentially varying amounts.
Also called: VAs
What is a variable annuity?
- Deferred variable annuities allow the investor to accumulate value in the annuity over time without paying taxes, unless they withdraw money during this phase.
- Immediate variable annuities require a large lump sum upon investment and do not have an accumulation phase.
- Payment value depends on the value and growth of the underlying holdings in the annuity.
- A variable annuity may be susceptible to higher fees and market risk than their fixed annuity counterparts.
A variable annuity is a type of annuity that provides periodic payments to investors (also known as annuitants). Unlike their fixed annuity counterparts, variable annuities may pay a different amount of money every pay period. This is because the payment rate of a variable annuity depends on the performance of the underlying holdings of the annuity. When the underlying holdings perform well, investors will receive higher payments. If the underlying holdings perform badly, investors may receive a lower payment.
Variable annuities are broken into two main types: deferred and immediate. Deferred variable annuities are more common as they can be purchased with either a lump sum or regular payments over time. The period in which the annuity holder makes payments is known as the “accumulation phase.” During this accumulation phase, growth on the investment in the annuity is tax-deferred, meaning that the investor will not have to pay any taxes on how much their investment has grown.
Taxes only start to affect the investment either when the investor withdraws money from the annuity or begins the next phase, which is the payout of the annuity.
In contrast, immediate variable annuities are rare and do not have an accumulation phase. They require a large lump sum as an initial investment and, as the name implies, begin the payout phase immediately. Given how variable annuities function, an investor should carefully consider the track record and specifications of one before investing in them.