Purchase payments for fixed annuities are deposited into the sponsor's general account and subject to the claims of the sponsor's creditors. A fixed annuity's guarantees are, therefore, only as good as the credit worthiness of the sponsor. Variable annuities are invested in equity mutual funds selected by the investor. Variable contract purchase payments are placed in a separate account, which is segregated from the sponsor's general assets. If the risks associated with equity mutual funds are acceptable, variable annuities may be the better alternative.
Annuities are one of the few tax-sheltered investment products that survived tax reform.
Most annuity withdrawals are made after retirement, when the investor is generally in a lower tax bracket. The ability to invest in equity mutual funds on a tax-deferred basis is an alluring feature of variable annuities. Because stocks generally outperform other investment instruments over the long term, variable annuities' stock-based investments, coupled with the tax deferral, can result in impressive investment returns. Changes in the tax laws reduced the amount that individuals with higher incomes can contribute annually to retirement plans. Annuity distributions may be delayed until age 85, unlike retirement plans, which generally require that distributions begin after age 70 .