How do variable and fixed annuities work?
Annuities are long-term vehicles used to provide retirement income to individuals without pensions, to supplement a pensioner’s income, or to build assets over a more limited period. With variable annuities, the value varies according to the worth of the insured’s investment options chosen. Payments can be fixed or variable. Under a fixed annuity (also called a fixed-dollar annuity), money is invested in assets with fixed rates of return. Because annuities are designed to be held for many years, the interest in an annuity builds up on a tax-deferred basis, and purchasers are generally not taxed until regular payments begin after retirement. Early withdrawals, however, result in substantial penalties in addition to income taxes.
