What is a variable annuity?

A variable annuity is a hybrid investment and insurance product designed to provide income in retirement. It involves paying premiums to an insurance company, which then invests the money in a selection of mutual funds or other investments. The value of the annuity can fluctuate based on the performance of these investments, hence the term "variable."

Key Features:

1. Income for Life: A variable annuity can provide a lifetime income, which can be appealing for retirees looking for stable cash flow 1.
2. Tax Deferral: Earnings within the annuity grow tax-deferred until withdrawal.
3. Investment Choice: Policyholders can choose how their money is invested, typically in different mutual funds 2.

Advantages:

• Longevity Risk Hedging: It offers protection against outliving your savings by guaranteeing income for life 2.
• Potential for Higher Returns: Depending on investment choices, there could be higher returns compared to fixed annuities or bonds 2.

Disadvantages:

• High Fees: Variable annuities often carry high fees for management, mortality, and expense risks, which can erode investment returns. The annual fees can be over 2%, in addition to surrender charges if you try to exit early 3 4.
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    Annuities Explained

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    Annuities Explained

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    3

    Fee Impact Analysis

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    4

    Variable Annuities Explained

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• Complexity: They are complex financial products with layers of fees and options that can be difficult to understand and manage compared to simpler investment products 4.

In summary, while variable annuities can offer benefits like guaranteed income for life and tax deferral, they come with significant downsides, including high fees and complexity, making them unsuitable for many investors.