It has been more than six years since Vanguard introduced the Single 5 Fixed Annuity in February 2002. As you may recall, this very conservative and low-cost annuity delivers a "fixed" percentage return for the first five years of its life, then adjusts annually.

You aren't taxed on this income until you make a withdrawal from your account, and you can take up to 10% of your accumulation value, annually, without paying the back-end surrender fee. The Single 5 Fixed Annuity is kind of like a 5-year Certificate of Deposit (CD) except that it comes in a tax-deferred wrapper and can be "rolled over" one year at a time with the accumulated income compounding on itself (see also, "Avoid Market Chaos With Annuities").

The risk with putting your money in a fixed annuity, like putting it into a bond, of course, is that interest rates may rise during the period that you're locked into that fixed rate of return. Folks who bought in three years ago, for instance, are still locked into a rate that's a good bit under the 4.65% now being offered. And with interest rates still pretty low, it's a good bet they'll be heading higher over the next five years.

With a bond, of course, if rates rise, you can sell the depreciated bond and book a loss, then buy a higher-yielding bond. With the annuity, you're locked in, though the principal value doesn't decline when rates rise. And unlike a municipal bond, where yields are completely tax-free, the annuity's income is eventually taxed when you make a withdrawal.

So, how has the Fixed Annuity changed over time? Well, it's held up a lot better than yields on 5-year Treasurys, that's for sure, and at some points, the rate has been even higher than that of the 10-year.

But there are catches. First, you need a minimum of $10,000 to invest in the Single 5. There's also a back-end load, or "surrender charge," ranging from 6% down to 3% if you take more than 10% of the annuity's value out within the first five years of your investment.

And finally, a fixed annuity is not something you can "add" money to. Each time you invest, you need to establish a "new" fixed annuity, which will almost certainly have a guaranteed rate of return that's different from your last one and will start the five-year clock ticking again (see also, "10 Things Vanguard Won't Tell You").

But there's another option for investors interested in long-term tax-deferred income. Unlike the annuity, it has no sales or operating fees or that hefty $10,000 minimum. And it has additional tax benefits as well. To find out more, check out my latest newsletter issue!