On a roll ... Ron and Dot Aquilina with two-year-old grandson Zac. Photo: Simon Alekna
While you've been losing money, annuities have been protecting others from the markets, inflation and even themselves.
Did you know the five years either side of retiring will determine how much you have for the rest of your life? Well, over the past 10 years annuities have done better than the sharemarket, with a guarantee your savings are safe thrown in.
The return on the day you buy an annuity is set in stone, either for a term you choose or for the rest of your life.
Challenger's Liquid Lifetime annuity pays 5 per cent which, because it's indexed, amounts to a guaranteed return that beats inflation by about 3 per cent a year for the rest of your life.
That's without any risk. The markets, interest rates, or even inflation can do what they like and your nest egg is safe.
Nothing could be more predictable - not even a new tax on super in Tuesday's budget - than an annuity.
It'll also be tax-free if you retire at 60 and if you use a super payout to buy one.
Poor super returns have given annuities a new lease of life. Liquid Lifetime "is going gangbusters", the head of marketing at Challenger, Stuart Barton, says.
But annuities have also become more appealing due to the unlikely, though I'm sure not unseemly, war of the actuaries.
With the lion's share of the market, Challenger is suddenly being, well, challenged by the Commonwealth Bank's CommInsure. It's actuaries at six paces.
As term-deposit rates have been dropping, returns on annuities have been going up.
CommInsure's three-year annuity was last week paying 5.45 per cent compared with 5.20 per cent two years ago.
Because the money market, which finances them, had long anticipated a rate cut - and a couple more, you may be interested to know - the impact on annuities will be "minor", Barton says.
It needn't be for life
Still, there is a loss of flexibility, though there seems to be an annuity for every occasion.
You can buy one as short as a year or as long as your life (with access to your capital in the first 15 years, too).
It will keep all your capital until the term expires, or you can take it out along the way with the regular interest.
Not surprisingly, the larger the capital you want to get back at the end of the term, the lower the annual payment will be. Soft touches actuaries are not.
And there's a potential trap. Even though you elect to get 100 per cent of your capital back, guarantee and all, you may not if you've been forced to take some of it out to bump up your minimum drawdown under quite separate rules for super.
That's not the annuity's fault but it's a consideration.
Unlike a managed fund, annuities have no fees. The risk the insurer is taking is already built into the return.
For all these bells and whistles, though, you wouldn't buy an annuity for its flexibility.
Unfortunately, the guarantee is a two-way street: you get the income no matter what, as regular as clockwork, but in return you can't ask for your money back early.
Well, you can, um, actuarily. That's another improvement - being able to commute an annuity early. The only penalty is the difference between the interest rates on the term you were being paid and where they are when you quit.
It's the same formula banks use if you cash in a term deposit early.
Financial adviser Laurie Ebert, a fan of annuities, says a misconception is that "people think that with an annuity if they put the money in and die, suddenly it disappears". But you can make an annuity reversionary, in which case your spouse, partner or dependent will inherit it, or it goes to your estate.
Even lifetime annuities, best if you expect to live longer than average, will return capital in the first 15 years.
The only way is up
Best of all, you can index an annuity for inflation. You can choose one linked to the consumer price index or a fixed percentage.
There's even one that you can link to the sharemarket with a guarantee of the return never falling.
CommInsure's guaranteed index tracked annuity (GITA) makes payments that can't fall but can increase by up to 5 per cent a year in line with the ASX200.
Mind you, the interest rate on an annuity could never be called generous. There's no way the insurance company is going to lose money over your dead body, which I guess is what eventually it comes to.
What you'll earn
Since you can only buy annuities through financial planners, there's either a fee or a commission payment, you'll be lucky to get 5 per cent on an all-your-money-back two-year annuity (or even 4.5 per cent if it's indexed) and not much more for very long terms.
For example, a 70-year-old with a reversionary option might earn 6.13 per cent for life with CommInsure, or 4.35 per cent if you add 3 per cent a year indexation.
But that could be a small price to pay for protecting your savings.
Anyway, chasing higher interest rates misses the point of what you should be doing with your life's savings. "If you want a guaranteed income for life, annuities are the only way you can do it," the head of technical services at Strategy Steps, Louise Biti, says.
"The best interest rate isn't the be-all and end-all. It doesn't matter what the sharemarket or interest rates are doing - you know you'll get the income," she says.
"If you have enough money for a comfortable but not lavish retirement and don't want to rely on the pension, think about a lifetime annuity - not for all your money, just enough to live on," Biti says.
Short-term thinking pays dividends
YOUR typical DIY super fund is stuffed with shares, but Ron and Dot Aquilina will have none of it.
They've carved out what Dot calls a ''comfortable standard of living, though we're not ones for going out all the time'' by putting all their super into annuities.
''We're paid monthly and it goes direct into our bank account,'' Dot says. ''It's always on time.'' The couple ran a locksmith business before they retired five years ago.
Their financial adviser since 1997, Laurie Ebert, recommends only annuities to his retired clients, so their super is safe.
But he doesn't touch lifetime annuities.
''Even a five-year term is too long,'' he says. ''You need the flexibility and access to your money - you might want to help the kids, for instance. At 65, you need more money than you will at 85, such as for travel, bills or a car.''
Besides, the long-term annuities ''are pushed by the financial institutions because they know you'll be locked in. It's better to stay short and just keep rolling over. That way you keep control of how much capital you have at the end.''
Normally, he advises the Aquilinas to buy a one-year annuity, but in December he recommended a two-year Challenger annuity because, Dot says, ''he anticipated lower interest rates''.
The Aquilinas have also used CommInsure annuities in the past. ''There's not a lot of difference,'' Dot says.