A variable annuity is a contract between an investor and the company selling it in which the company agrees to make periodic payments to the investor, beginning immediately or at some future date. The investor buys a variable annuity contract by making either a single purchase payment or a series of payments. The payments to the annuity holder vary and are determined by the performance of the underlying investments. Variable annuities offer several investment options, usually involving mutual funds that invest in stocks, bonds or money-market instruments, or some combination of the three. With fixed annuities, by contrast, all payments to the annuity holder are equal.
Variable annuities differ from mutual funds in several important ways.
They are tax-deferred, for example, which means annuity holders pay no taxes on the income and investment gains from their annuities until they withdraw their money.