What is a variable annuity?

A variable annuity is a retirement account that allows a person to choose her investments, and the annuity provides an income based on how well the investments are doing in the stock and bond markets, explains CNN. A variable annuity is tax deferred.

Unlike a fixed annuity, which offers a guaranteed payout amount, a variable annuity is designed to increase the investor's savings by giving her a chance for long-term capital growth, says CNN. This is because the person invests in stocks or bonds in a subaccount similar to a mutual fund. Any gains the annuity receives are not taxed until the funds are withdrawn.