A variable annuity should not be confused with other types of retirement investment plans as it has unique features that set it apart from the rest and these include:
The premiums payable in a variable annuity are quite flexible and there is no cap on the amount of money that an individual can contribute in a year. This is different from other retirement plans such as a 401(k) in which an investor is not allowed to contribute more than the set limit. Investors who are wealthy and who would like a large amount of money paid to them after they have retired will be limited by this cap.
There is also no set amount of money that the investor can contribute at a given time, and the individual can continue adding to their retirement plan for as long as they want. The premiums they pay can vary depending on where they are financially at a given time.
2. Tax payment is deferred during the accumulation phase
This means that the investor does not pay any tax for the amount gained while in the accumulation phase. Tax is only charged after the individual has started withdrawing funds from their variable annuity, meaning that they can postpone withdrawal for as long as they want while accumulating income in their account without ever being taxed for it. This is different from other types of investments such as a mutual fund which is usually taxed every year.
3. Sub-accounts in a variable annuity
The accounts of a variable annuity are usually separate from those of the insurance company, and these sub-accounts usually depend on the investment option that the investor chose. The most common sub-accounts are usually those dealing in stocks – US and international, bonds – both corporate and government as well as the money market.
The individual has the option of allocating their funds to different investments within the different sub-accounts and they also have the option of transferring from one investment option to another without being taxed for it.
4. The rate of returns varies and it is not possible to predict it
Investment in a variable annuity is tied to different options and the value or returns on these investment options are determined by market forced that are beyond the investor’s or insurance company’s control. Therefore there is the risk of losing everything, or gaining a lot with a variable annuity, and the rate of return may be different each year. An investment option may perform very well in one year and very poorly in the next. It is not possible to predict how the market will fare by the time it is time to make withdrawals which may be about ten years from the date of purchase of a variable annuity.
A variable annuity is an investment option like many others, but the above four features are what differentiate it from any other type of investment option and make it stand out. The risk factor of a variable annuity makes it different in that there is always the risk of great losses as well as the potential for great rewards.