Q.With saving account and CD rates so low, I was intrigued by a letter from a bank offering 5-7% APY for something they call a tax-deferred, fixed-rate annuity. What the heck is an annuity and would you recommend it when such good rates are being offered?

A. An annuity is a saving or investment vehicle that allows interest or profits to grow on a tax deferred basis. No tax is due until that time profits are withdrawn.

Annuities also offer various payout options and insurance features that can protect your principal and guarantee certain rates of return. Annuities are sold either as fixed plans or variable contracts.

The fixed annuity offers a stated interest rate for a period of time. While most plans do allow earnings to be withdrawn each year without cost, penalties may apply to early withdrawals. Annuities list a beneficiary and therefore avoid probate.

Variable annuities allow the investor to utilize dozens of different mutual funds available inside the annuity plan. Transfers between funds do not generate taxation or transaction expense. Hundreds of companies offer annuities today. Be sure to read the prospectus and compare plans before investing.

Some savings products are offering "enticement" interest rates which are far above the market norm. Read the fine print. The plans will pay that great rate but usually for a limited time.

In addition, the super interest is offset by large surrender changes that can last as long as the life of the account! If it sounds too good to be true, it probably is or at least comes with some serious trade offs.