Desperate investors are locking in annuities at low rates

— -- Low savings rates and a rotten stock market sent record numbers of savers to lock in current rates with fixed annuities — precisely when rates were near rock-bottom.

Fixed annuity sales jumped 74%, to $35.6 billion, the highest ever, for the three months ended March 31, the most recent data available from insurance consulting firm Limra.

Fixed annuities are a contract with an insurance company that, such as bank CDs, promise a set interest rate over a period of time. Unlike CDs, annuities aren't guaranteed by federal deposit insurance. Instead, they're covered by state guaranty funds.

The big reason fixed annuities are popular now: They can offer higher interest rates than bank CDs, says Chris Blunt, vice president in charge of retirement security at New York Life. "You've seen rates on fixed-income products come down a lot," Blunt says.

A fixed annuity from a top-rated company will guarantee yields of 3.3% to 3.5% for five years before resetting to a new rate, according to DirectAnnuities.com. A five-year bank CD yields an average 2.13%, Bankrate.com says. You don't pay taxes on annuity income until you withdraw it.

The other reason for soaring fixed annuity sales: fear. The Standard & Poor's 500-stock index has lost 23% in the past decade, making guaranteed investments such as CDs and annuities more appealing.

Sales of variable annuities, which allow policyholders to move money around in investments similar to mutual funds, have fallen below fixed annuities for the first time since 1995, says Dan Beatrice, senior analyst at Limra's Retirement Research Center.

"Clients got nervous and wanted to be in safer investments," says Elizabeth Forget, senior vice president of marketing for MetLife.

But is this a good time to lock in rates in an annuity? No, says Greg McBride, senior financial analyst at Bankrate.com. "It's a little like locking in at the bottom," McBride says.

Fixed annuities typically charge surrender fees for withdrawals in the first seven to 10 years. (Many also allow a fee-free withdrawal of up to 10% per year.) You'd be better off taking the early withdrawal penalty from a five-year bank CD if interest rates rose, McBride says.