What it means
A variable annuity pays income in two currencies at once: the number of units is fixed, but the money each unit buys moves with the markets underneath. At annuitisation, the first payment is set from the fund's value, the chosen income option and an assumed investment return, and that payment is then divided by the current unit price to fix the unit count.
From then on the count never changes, so a retiree credited with 1,000 units keeps 1,000 units for life, through booms, crashes and everything between. What changes is the unit's price: each period the insurer reprices units against actual fund performance, and the next cheque equals the fixed count times the new price.
An assumed investment return sits at the mechanism's heart, since if markets beat the assumption cheques grow, and if they lag they shrink, and the retiree carries that risk directly. Insurers disclose the assumed return prominently for a reason, because a high assumption flatters the first cheque but makes future cuts likely, so the conservative assumption often serves the retiree better.
The design trades certainty for a fighting chance against inflation, as fixed annuities pay level dollars that erode while unit-based income can climb with markets, though nothing promises it will. Payout options shape the first cheque, not the unit maths, since life only, period certain and survivor versions each change the starting payment, then the fixed-count, floating-price engine takes over.
The accumulation phase has a cousin measure: while money builds, the contract tracks accumulation units, which convert into annuity units when income begins - two unit systems, one contract. Charges still apply underneath, because mortality, expense and fund fees are deducted inside the unit pricing, quietly shrinking every cheque relative to raw market performance.
Statements translate units back to dollars each period, and regulators require clear disclosure of the unit method precisely because the translation is not intuitive for most contract holders. For a manager comparing retirement products, the key lesson is that "variable" refers to this unit machinery, because income denominated in units is income denominated in market outcomes.
In practice
Real-world examples.
Example
A retiree's first cheque of $1,500 divides by a $10 unit price to fix 150 units; when the price rises to $10.40, the next cheque is $1,560 with no decision by anyone. The retiree's statement shows the unit count, the new price and the payment. The increase reflects the fund beating its assumed return.
Example
A contract assuming a 5 percent return pays steady cheques while markets earn exactly 5 percent, raises them after a strong year, and cuts them after a bad one. The retiree can see the reason on the statement. A household budget built on the lowest likely cheque copes with the swings.
Example
Two neighbours annuitise identical funds, one choosing a 3 percent assumed return and one 7 percent; the first starts lower but holds up, while the second's cheques sag as markets fail to clear the bar. After a few years of average markets, the first neighbour's income has overtaken the second's. Both made rational choices, but only one matched the market's likely path.
Formula
Calculation
The mechanics: fixed units = first payment / initial unit price, and each later payment = fixed units x current unit price. The unit price itself steps up or down by the ratio (1 + actual fund return) / (1 + assumed investment return), so payments track markets relative to that benchmark.
Worked example: the first payment is $1,500 and the initial unit price is $10, so fixed units = 1,500 / 10 = 150. With an assumed return of 5%, a year in which the fund earns 9.2% changes the unit price by 1.092 / 1.05 = 1.04, so the price becomes $10.40 and the next payment is 150 x 10.40 = $1,560. In a year in which the fund earns 0%, the price changes by 1 / 1.05 = 0.9524, so it becomes about $9.52 and the next payment is 150 x 9.52 = about $1,429. The unit count stays at 150 throughout.Case study
Seen in the real world.
A made-up school superintendent annuitises her variable annuity at 66. This case study is fictional and illustrative. Her 210 units pay $1,680 the first year, $1,790 after a strong market year and $1,610 after a weak one, and she learns to budget on the low case while treating rises as surplus. In this illustrative scenario, the unit price moves from $8.00 to about $8.52 after the strong year and to about $7.67 after the weak year, because $1,680 / 210 = $8.00, $1,790 / 210 = $8.52 and $1,610 / 210 = $7.67.
Her unit count stays at 210 each time. The superintendent set her fixed household costs against the $1,610 low case and put the extra $180 from the strong year, $1,790 - $1,610, into a reserve account. The fictional reserve cushioned her through the next weak year without a change in lifestyle.
Watch out
Common mistakes.
- Believing the income is guaranteed in dollars; only the unit count is fixed. Payments fall when markets lag the assumed return, sometimes sharply.
- Choosing a high assumed return for a bigger first check; the bar rises for every later payment. A lower assumption starts smaller but is far likelier to hold or grow.
- Ignoring the fees embedded in unit pricing; mortality, expense and fund charges reduce performance before it reaches the check. Compare net illustrations, not gross market stories.
Questions
People also ask.
What is an annuity unit?
The measure a variable annuity uses in its payout phase. The fund converts into a fixed number of units, and each income payment equals that fixed count times the unit's current market-linked price.
Do payments from a variable annuity change?
Yes. The unit count is locked for life, but the unit price moves with investment performance against an assumed return, so checks rise in strong markets and fall in weak ones.
How do annuity units differ from accumulation units?
Accumulation units track value while money builds before retirement. At annuitization they convert into annuity units, which then govern the size of each income payment.
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