What primarily distinguishes a fixed annuity from a variable annuity?

The primary distinction between a fixed annuity and a variable annuity lies in the nature of the returns they offer, specifically the guaranteed interest rate. A fixed annuity provides a guaranteed interest rate, ensuring that the policyholder knows exactly how much interest will be earned on their investment for a specified period. This aspect of fixed annuities makes them attractive to individuals seeking stability and predictability in their financial planning, particularly in retirement.

In contrast, variable annuities are tied to the performance of underlying investment options, such as mutual funds. This means that the returns from a variable annuity can fluctuate based on market performance and are not guaranteed, potentially presenting both higher gains and higher risks compared to fixed annuities. Therefore, the guarantee of a specific interest rate is what fundamentally separates fixed annuities from their variable counterparts.