With $500k, getting over 5% shouldn't be too tough. Even good old Bank of America has a 5.55% money market savings account if you have at least $50k (check out their MyExpression accounts). Just using that will give after-tax income of $20,812.50, which out-does the annuity idea.

More importantly, ALL of the income being taxed at the 25% rate implies that she is earning approximately $30k to $50k aside from this income (since otherwise the effective tax rate would be less than 25%). If that's the case, and she expects to continue to receive that income, she can probably increase her risk in the investment and earn a higher return (maybe put 30% in stocks?).

If that's not the case (i.e. she will lose that other income), then we need to look at the effect that has on her taxes. $500k @ 5.55% investment income, using 2007 tax tables, will give her $23978.75 after taxes (effective tax rate of 13.6% instead of 25%), which is quite a bit better. That's also ignoring the standard deduction and any other deductions or credits she might have, which should push it to $24500 or more.