Cash flows received on a variable pay annuity (not fixed annuity) are based on the performance of an underlying fund or set of funds selected by the investor and thus the cash flows are variable and could be zero if the performance of the underlying funds is negative for the investment period. Drawbacks to fixed annuities are:

• cash flows are fixed and do not increase with the rate of inflation thus the real value of the cash flows decreases over time.
• cash flows are based on the level of interest rates at the time the annuity goes into effect. If interest rates are low when the contract goes into effect this would lock in a low rate of return to the investor.
• the annuity is illiquid and difficult to get out of the contract.