Definition:  A variable annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments. 

Not a Fixed Annuity:  Annuities that make payments in fixed amounts or in amounts that increase by a fixed percentage are called fixed annuities. Variable annuities, by contrast, pay amounts that vary according to the investment performance of a specified set of investments, typically bond and equity mutual funds.

See "More about Variable Annuities."

Warning: Before you buy a variable annuity, you should know some of the basics – and be prepared to ask your insurance agent, broker, financial planner, or other financial professional lots of questions about whether a variable annuity is right for you.

Pros of a variable annuity

• Like IRAs, money deposited in a variable annuity grows on a tax-deferred basis, so that taxes on investment gains are not due until a withdrawal is made.
  
• Unlike regular IRAs, variable annuities are not subject to required minimum distributions (RMDs).
• Variable annuities offer a variety of funds ("subaccounts") from various money managers. This gives investors the ability to move between subaccounts without incurring additional fees or sales charges.  This is good if you want more risk with equities when you are young then you move more into bond funds as you get near retirement.   
  

Cons of a variable annuity -

• They are EXPENSIVE!  
• You will pay for each benefit provided by your variable annuity. Be sure you understand the charges. Carefully consider whether you need the benefit. If you do, consider whether you can buy the benefit more cheaply as part of the variable annuity or separately (e.g., through a long-term care insurance policy) 
  
• Many have high early termination fees should you need your money in an emergency.
  
• Penalty for early withdrawal:  Policyholders cannot withdraw money from the account until they are 59.5 years old. If a policyholder makes an early withdrawal, there will be a 10% penalty assessed.
• Taxes can be higher on capital gains because the money taken out is taxes as ordinary income.  You are often far better off investing in low cost index funds such as those from Vanguard and Fidelity recommended by "The Retirement Advisor" -  FREE SAMPLE ISSUE