What type of annuity serves as a protection against inflation and provides varying returns?

A variable annuity is designed to provide protection against inflation and offers varying returns based on the performance of underlying investments, typically mutual funds. This type of annuity allows the policyholder to allocate their premiums among various investment options, which can potentially grow the account value at a rate that outpaces inflation over time. Since the returns are not fixed and depend on the performance of the selected investments, they can fluctuate, providing the opportunity for higher returns as the market performs well.

In contrast, a fixed annuity provides a guaranteed return at a set interest rate, which does not adjust for inflation. An immediate annuity begins payments almost immediately after a lump sum is paid, whereas a deferred annuity delays payments to a future date, both of which do not directly address the issue of inflation protection in the same way as a variable annuity. Thus, for those looking to hedge against inflation with the potential for increased returns, a variable annuity is the most suitable option.