So we're diving into annuities.
Maybe not the most exciting thing at first glance,
but stick with us.
This deep dive, I think it might change your perspective
a bit.
Annuities, they're making a comeback, did you know?
I've heard that.
Yeah.
We'll kind of unpack some of the common misconceptions
and things about annuities and highlight the factors
you need to think about before you jump in.
Yeah, for years annuities weren't really the hot ticket.
Below interest rates made them seem, well, less attractive.
So people, you know, they turn to dry down,
where you manage your investments
and take an income as needed.
Yeah, yeah.
But then things changed, right?
Exactly, interest rates are going up.
Yeah.
And that changes the whole game.
Higher interest rates mean, well,
potentially larger annuity payouts
make some a lot more attractive.
Right.
Think of it this way, when interest rates are high,
insurance companies, they can invest
that lump sum you give them more effectively,
get better returns, and they can pass those on to you
in the form of higher annuity payments.
So this is where it gets a little, I don't know, sticky.
In the UK, unlike other insurance
where you have tons of choices,
there are only a few annuity providers.
And to be honest, Burroughs points out
that the customer service from these companies,
not always great, they downsized when annuities
fell out of favor and now they're trying to, you know,
catch up with the demand.
It's frustrating, especially when you're making
such a big financial decision.
For sure.
It really highlights why you need to do your research.
Carefully evaluate all your options.
Yeah.
And there's another layer to this.
A lot of financial advisors, they're actually incentivized
to steer you away from annuities.
Wait, really?
Yeah, think about it.
If you go for drawdown, the advisor can manage your money
and charge you fees.
There's a potential conflict of interest there.
Wow.
You want an advisor who'll give you both options fairly,
help you figure out what works for you.
Okay.
Not just what makes them money.
We call this two-handed advice.
Two-handed.
Yeah, getting a balanced view, you know,
not being pushed in one direction or the other.
It makes you wonder how many people have been, you know,
pushed towards drawdown just because it makes
the advisor more money.
Yeah, that's a good point.
Let's be honest, a lot of people,
they're a little anxious about annuities.
Right.
They're a bad deal or legalized theft.
Yeah, I've heard it all.
It's a big decision.
There's a lot of, I don't know, misinformation out there.
Yeah.
But here's the thing, annuities,
they aren't inherently good or bad.
It all comes down to your personal situation
and what you want.
Out of retirement, I mean.
Okay, so what are the key questions
people should be asking themselves?
Like before they even consider an annuity.
We gotta think about your priorities.
Do you want flexibility above all else?
Okay.
Is leaving a big inheritance important?
Right.
Or is it about that guaranteed income stream?
Yeah.
The answers to these questions,
those are gonna help you shape your retirement strategy.
Yeah.
And figure out if an annuity fits in.
So it's like figuring out all the pieces
of your retirement puzzle
before you try and jam them all together.
Exactly.
But how do you even begin to weigh
those different priorities?
A good financial plan.
That's crucial.
There are tools like cash flow modeling.
That can help you visualize
different retirement scenarios.
Figure out the best mix of annuities
and drawdown and things.
That way you can kind of see the potential outcomes
of different approaches.
Uh-huh.
And make informed decisions.
That sounds really helpful,
especially when you're dealing with all this
kind of complex financial stuff.
Yeah.
We'd spot for annuities might actually be later
in retirement.
You might start with drawdown, right?
Enjoy that flexibility and potential growth.
Right.
But then as you get older,
gradually shift towards a larger chunk
of guaranteed income.
Yeah.
From annuities.
This approach, it aligns with how people's priorities
tend to change.
So younger you might be more focused
on leaving in inheritance.
It's about recognizing that your needs
and your priorities, they'll likely change over time.
And having a plan that adapts to those shifts.
Okay, this is where it gets a little unnerving.
Sequence of returns risk.
It's something a lot of people don't even realize
they're exposed to with drawdown.
Right, right.
Let's say two people, they each have 100,000 pounds.
Okay.
One buys an annuity, gets a guaranteed 6,000 pounds a year.
Okay.
The other, they draw down 6,000 a year
from their investments, hoping for growth.
Right.
Now imagine the market tanks.
Oh yeah.
The person relying solely on drawdowns
could see their capital disappear pretty quickly.
Yikes.
But the person with the annuity.
Yeah.
They keep getting that guaranteed income.
Yeah.
No matter what the market's doing.
It's a good point.
It's a stark reminder that market downturns,
especially early in retirement, can really impact
your long-term financial security.
Right, and that's where the guaranteed income
from an annuity, it acts like a safety net.
Yeah.
Especially when things are unpredictable.
Now here's something that might seem counterintuitive.
The older you get, and if your health isn't great,
the higher the income an annuity will usually pay out.
Hey, really?
That seems kind of strange.
That makes perfect sense if you think about it
from the insurance company's side.
Okay.
As we age, and if our health declines,
our life expectancy, statistically, it decreases.
Mm-hmm.
The insurance company, they're taking on less risk.
Right.
And that's why they can offer higher payouts.
Huh.
It's a concept rooted in something called mortality drag
and mortality cross subsidy.
Okay.
Basically, the pool of annuity buyers,
it shrinks over time, and the prices adjust accordingly.
So even though it seems counterintuitive,
it's actually a logical outcome of how annuities work.
Right.
How do you know when's the best time to buy an annuity?
Is it worth trying to time the market?
That's a common question.
But trying to perfectly time your purchase,
it can be a tricky game.
It's less about trying to outsmart interest rates,
and more about your own personal need.
Right.
For that guaranteed income, and peace of mind.
So it's less about playing the market,
and more about, well, making sure your financial decisions
align with your goals and your risk tolerance.
Exactly.
Instead of going all in with a single purchase,
boroughs suggests a, well, a more gradual approach.
You mean buying annuities in stages.
Exactly.
More flexibility allows you to dollar cost average
your purchases over time, smooth out the impact
of interest rate fluctuations, kind of like diversifying
your investment portfolio, but instead of spreading
your money across different assets,
you're spreading your annuity purchases over time.
Okay.
And it's worth remembering, even if you don't buy
a private annuity, you're already in a form
of annuitization through the state pension.
Right.
The state pension, it acts like a guaranteed income floor
for most UK retirees.
Important to factor that into your planning.
But here's a curveball.
With the UK general election coming up,
there's talk of changes to pension rules,
especially around inheritance.
Well, the layer of complexity, yeah.
Right.
Do you hold onto your pension
for potential tax-free inheritance?
Or take control now, use some of it to buy an annuity.
It's a tough one, balancing future flexibility
and present peace of mind.
So instead of fixating on the highest possible income
from a single annuity, you're looking at your whole
retirement income picture, making sure it's stable
and sustainable.
Precisely.
It's about a strategy that provides both financial
security and the freedom to live the retirement you want.
This has been really insightful,
making me rethink my own approach to retirement planning.
What if you could buy an annuity that's like
linked to inflation?
Oh, okay.
One that guarantees your income goes up,
along with the cost of living.
Would that be the ultimate peace of mind thing?
Even if it meant the lower initial payout.
That's a fascinating concept.
Makes you realize how much we're willing to,
I don't know, trade off for that sense of security,
especially with inflation being, well, a concern.
It also kind of highlights a risk of that a lot of people,
maybe they don't even think about it
when they're planning for retirement.
It's easy to just focus on now.
But imagine having a fixed income
and it doesn't keep up with prices going up.
That could really impact your quality of life.
For sure.
And inflation linked annuity,
even with a lower starting income,
might actually give you more long-term security
and purchasing power.
I see what you mean.
The key takeaway, I think,
is that holistic view of retirement income.
Annuities, drawdown, the state pension.
It's about, I don't know,
piecing it all together strategically.
Absolutely.
And those pieces, they should fit together
in a way that, well,
along with your own circumstances, your priorities.
It's not a one-size-fits-all.
This deep dive has,
well, it's really given me new perspective on annuities.
They're not just some boring financial product.
They're a potential tool, right,
for building a retirement that's both secure
and fulfilling.
Retirement planning, it's more than just numbers.
It's about making your financial decisions
match your values, your goals.
And what's really important to you,
it's about crafting a retirement that reflects who you are
and what you wanna do.
We've covered a lot, the resurgence of annuities,
the whole finding an advisor
who gives balanced advice thing.
Annuitization, the risks and rewards
of different income strategies.
Yeah, we've touched on the emotional side, too,
that need for peace of mind,
the fear of outliving your savings,
and, of course, the whole political landscape.
How potential changes to pension rules
could affect everything.
So where do we go from here?
What's the, I don't know,
the most important takeaway for listeners
from this whole deep dive?
There's no one right answer when it comes to annuities.
The best strategy, it's what suits you best.
This deep dive, it's about giving you knowledge,
a framework for making decisions.
Even if you decide an annuity isn't right for you,
right now, at least this conversation,
hopefully it's giving you some things to think about.
I think so, too.
It's made me ask new questions,
challenge some assumptions I had about retirement planning.
And maybe it's given you the confidence
to have those conversations with a financial advisor.
Right.
Armed with a better understanding of what you want.
Yeah.
And what's out there.
Because at the end of the day, retirement planning,
it's about taking control of your financial future,
designing a retirement that, well,
you can really look forward to.
That's the heart of it.
Empowerment, knowledge, making informed decisions.
But people, they often ask the wrong question
about annuities.
They ask, what's the highest income I can get?
When they should really be asking.
How much guaranteed income do I need to feel secure,
to live the retirement I want?
That shift in perspective is huge.
It's not about chasing the biggest number.
It's about making your financial strategy
match your vision for retirement.
Exactly.
That balance, financial security,
and personal fulfillment.
As you go through your own retirement journey,
keep that question in mind.
It might just lead you to a more fulfilling and, well,
financially secure future.
It's about designing a retirement that lets you
live life on your terms.
You don't have to do this alone, right?
Exactly.
Find a financial advisor who actually gets you.
Not just someone trying to sell you something,
someone who can give you that, what was it?
Two-handed advice.
Two-handed advice, yeah.
So to our listener, go out there,
ask the tough questions, challenge your assumptions,
and create a retirement that you can truly look forward
to you've earned it.