Fixed vs. Variable vs. Indexed Annuities: Which Is Right for You?

If you are considering an annuity for retirement income, one of the first decisions you will face is choosing the type. Fixed, variable, and indexed annuities each work differently, carry different levels of risk, and charge different fees. The right choice depends on your financial goals, risk tolerance, and how much complexity you are willing to accept.

This guide breaks down the three main annuity types side by side so you can understand the trade-offs and make an informed decision. This article is for educational purposes only and does not constitute investment or financial advice. Consult a qualified financial advisor before purchasing any annuity.

Fixed Annuities: Guaranteed Rate, No Market Risk

A fixed annuity pays a guaranteed interest rate on your money for a specified period. Your principal is protected, and your account value grows at a predictable, steady pace. There is no market risk. Whether the stock market goes up 20 percent or down 30 percent, your fixed annuity earns the same guaranteed rate.

Fixed annuities are regulated by state insurance departments. They are not considered securities, so they do not fall under SEC regulation. The insurance company invests your premiums primarily in bonds and other conservative assets and guarantees you a minimum rate of return.

The most popular type of fixed annuity today is the multi-year guaranteed annuity, or MYGA. A MYGA locks in a specific interest rate for a term you choose, typically three to ten years. It works like a CD from a bank but with tax-deferred growth. As of February 2026, MYGA yields are near 15-year highs, with the best ten-year rates reaching 7.65 percent and five-year rates around 6.30 percent.

Pros of Fixed Annuities

• Guaranteed interest rate eliminates uncertainty
• Principal is protected from market losses
• Simple and easy to understand compared to other annuity types
• Lower fees than variable annuities, with costs generally built into the rate
• Tax-deferred growth until withdrawal

Cons of Fixed Annuities

• Returns are limited to the guaranteed rate with no upside potential
• Inflation can erode the purchasing power of fixed payments over time
• Surrender charges apply if you withdraw early
• Fee transparency can be limited since costs are often built into the offered rate rather than shown separately

Fixed annuities are best suited for conservative investors who prioritize safety and predictability over growth potential. They work well as a bond alternative in a retirement portfolio or for people who want a guaranteed rate without worrying about market fluctuations.

Variable Annuities: Market-Based Growth With Higher Risk

A variable annuity lets you invest your money in sub-accounts, which function like mutual funds. Your account value rises and falls based on the performance of the investments you choose. This means you have the potential for higher returns than a fixed annuity, but you also take on the risk of losing money if the market performs poorly.

Variable annuities are securities and are regulated by the SEC and FINRA, in addition to state insurance departments. Anyone selling a variable annuity must hold a securities license. The SEC requires that you receive a prospectus before purchasing a variable annuity, which details the investment options, fees, risks, and other important information.

Variable annuities carry the highest fees of any annuity type. Total annual fees commonly range from two to three percent per year. These fees include the mortality and expense (M&E) charge (averaging about 1.25 percent), administrative fees, underlying fund expenses (0.5 to 2 percent), and any optional rider charges. Over 20 or 30 years, these fees can significantly reduce your investment returns compared to investing directly in mutual funds or exchange-traded funds.

Pros of Variable Annuities

• Potential for higher returns through market-based investments
• Tax-deferred growth on investment gains
• Wide selection of investment options across asset classes
• Optional riders can add guaranteed income or death benefit features
• No contribution limits on non-qualified contracts

Cons of Variable Annuities

• You can lose money if investments perform poorly
• Highest fees of any annuity type, averaging two to three percent annually
• Complex contract terms and fee structures
• Surrender charges for early withdrawals, often lasting six to eight years
• Gains taxed as ordinary income, not at lower capital gains rates

Variable annuities are best for investors who want market exposure with tax-deferred growth and are comfortable with the higher fee structure. They may make sense for people who have already maxed out 401(k) and IRA contributions and want additional tax-advantaged growth. However, the SEC cautions investors to carefully consider whether the tax-deferral benefits outweigh the additional costs compared to investing directly in mutual funds.

Fixed Indexed Annuities: A Hybrid Approach

A fixed indexed annuity (FIA) attempts to offer the best of both worlds: some participation in market gains when the market goes up, and protection against losses when the market goes down. Your interest earnings are linked to the performance of a market index, such as the S&P 500, but your principal is protected by a guaranteed floor, usually zero percent.

The trade-off for downside protection is that your upside is limited. Indexed annuities use caps and participation rates to determine how much of the index gain you actually receive. A cap sets a maximum interest rate for a given period, typically three to seven percent. A participation rate determines the percentage of the index gain credited to your account, typically 50 to 100 percent. For example, if the index gains 10 percent and your participation rate is 70 percent with a 6 percent cap, you would receive 6 percent (the cap), not the full 7 percent that the participation rate would otherwise give you.

Pros of Fixed Indexed Annuities

• Principal is protected by a floor, typically zero percent
• Potential for higher returns than a fixed annuity in good market years
• Tax-deferred growth until withdrawal
• Optional income riders can provide guaranteed lifetime withdrawal benefits

Cons of Fixed Indexed Annuities

• Caps and participation rates limit your upside, so you will never capture the full index return
• Complex crediting methods can be difficult to understand
• Caps and participation rates can change at the insurer's discretion at renewal
• Surrender periods are often longer than other annuity types, sometimes 10 years or more

Fixed indexed annuities are best for people who want some market participation without the risk of losing principal. They sit between fixed and variable annuities on the risk spectrum. They are popular with pre-retirees and retirees who want growth potential but cannot afford to lose money in a market downturn.

Side-by-Side Comparison

Here is a summary comparison of the three main annuity types across the most important factors.

Risk level. Fixed: low risk, guaranteed rate. Variable: high risk, market-dependent. Indexed: moderate risk, floor protection with capped upside.

Return potential. Fixed: locked in at the guaranteed rate (best rates around 6-7+ percent in February 2026). Variable: unlimited upside, but also unlimited downside. Indexed: moderate upside, limited by caps (3-7 percent) and participation rates (50-100 percent).

Fees. Fixed: generally lowest fees, built into the rate. Variable: highest fees, averaging 2-3 percent per year. Indexed: moderate fees, often built into cap and participation rate structures.

Regulation. Fixed: state insurance departments. Variable: SEC, FINRA, and state insurance departments. Indexed: state insurance departments (in most states).

Complexity. Fixed: simplest to understand. Variable: complex due to investment choices and fee layers. Indexed: complex due to crediting methods, caps, floors, and participation rates.

Principal protection. Fixed: yes, fully guaranteed. Variable: no, account value fluctuates. Indexed: yes, protected by floor (usually zero percent).

Matching Annuity Type to Your Risk Tolerance

Your risk tolerance is one of the most important factors in choosing an annuity type. Here is a general guide based on how you feel about market risk.

• Conservative (low risk tolerance). You want safety and predictability above all else. A fixed annuity or MYGA is likely your best fit. You know exactly what you will earn, and your principal is protected.
• Moderate (balanced risk tolerance). You want some growth potential but cannot afford to lose principal. A fixed indexed annuity may suit you. You participate in some market gains while the floor protects against losses.
• Aggressive (high risk tolerance). You are comfortable with market volatility and want the potential for higher returns. A variable annuity gives you the widest range of investment options, but you must accept the possibility of losing money.

Keep in mind that risk tolerance often changes as you approach and enter retirement. Many people become more conservative over time as they shift from accumulating wealth to preserving it. A financial advisor can help you assess your risk tolerance and match it to the right product.

Fee Comparison: What You Actually Pay

Fees are one of the most important differences between annuity types. Even small differences in annual fees can significantly impact your long-term returns.

Fixed annuity fees are generally the lowest. There is typically no explicit annual fee. The insurance company makes money on the spread between what it earns on its investments and the rate it guarantees you. Surrender charges still apply if you withdraw early, usually starting around seven percent and declining over six to eight years. The lack of transparent fee disclosure is a drawback, but the total cost to you is typically low.

Variable annuity fees are the highest and most complex. A typical breakdown includes the mortality and expense charge (around 1.25 percent per year), administrative fees ($25 to $50 per year or 0.15 percent), underlying fund management expenses (0.5 to 2 percent per year), and optional rider fees (0.25 to 1 percent each per year). Total annual fees commonly reach two to three percent or more. These fees are deducted from your account value each year regardless of performance.

Indexed annuity fees fall in between. There is usually no explicit annual fee on the base contract. The insurance company's costs are built into the cap and participation rate structure. However, optional riders such as guaranteed lifetime withdrawal benefits typically cost 0.25 to 1 percent per year and are charged as an explicit annual fee deducted from your account. Surrender charges on indexed annuities are often longer than other types, sometimes lasting ten years or more.

The Bottom Line

Fixed, variable, and indexed annuities each serve different purposes and suit different types of people. Fixed annuities offer safety and simplicity at the cost of limited growth. Variable annuities offer growth potential at the cost of market risk and high fees. Indexed annuities offer a middle ground with principal protection and capped upside.

The current rate environment, with MYGA rates near 15-year highs, has made fixed annuities particularly attractive. But the best annuity for you depends entirely on your personal financial situation, risk tolerance, and retirement goals. No single type is universally better than the others.

Before purchasing any annuity, consult a qualified financial advisor who can assess your complete financial picture. Read the contract carefully, understand all fees and surrender charges, and never feel pressured into a purchase. An annuity is a long-term commitment, and the right choice can provide security and income for decades.