The main difference between variable and fixed annuities is who assumes the investment risk. A fixed annuity earns interest at a rate guaranteed by the insurance company when you're saving for retirement and then guarantees payment of a specific dollar amount - for example $3000 per month - when you retire. With a variable annuity the return is tied to the performance of your underlying investments, so the investment risk is on the policyholder. But since you can invest in stock funds, a variable annuity can generate higher returns than a fixed annuity. And, these higher returns translate into a larger retirement nest egg and higher annuity payments when you retire.

Variable annuities also allow you to have the annuity payments based on the investment performance of the underlying portfolios which provides the possibility of growth and rising income over time.