WEBVTT 00:00:00.910 --> 00:00:03.430 Hey everyone, Eric here from Time to Retire. 00:00:03.509 --> 00:00:06.710 Thanks for joining me again. Now if you've been 00:00:06.710 --> 00:00:09.089 watching the channel for a while you will know 00:00:09.089 --> 00:00:14.230 that I am a big fan of the flexibility of drawdown 00:00:14.230 --> 00:00:19.309 for your pension. Now I love the idea of keeping 00:00:19.309 --> 00:00:22.469 the money in my own pocket and having that freedom. 00:00:23.690 --> 00:00:28.510 But today let's take another angle on this. We 00:00:28.510 --> 00:00:31.460 often hear that annuities are old -fashioned 00:00:31.460 --> 00:00:35.020 but for some of us drawdown can actually be a 00:00:35.020 --> 00:00:37.820 psychological nightmare. There are three big 00:00:37.820 --> 00:00:40.619 risks that I want to talk about that every UK 00:00:40.619 --> 00:00:43.780 retiree needs to hear because it's not just about 00:00:43.780 --> 00:00:46.479 the maths it's actually about your peace of mind. 00:00:48.619 --> 00:00:51.479 So the first one is what professionals call the 00:00:51.479 --> 00:00:53.939 sequence of returns risk but let's you and I 00:00:53.939 --> 00:00:57.369 just call it the early bad luck factor. now think 00:00:57.369 --> 00:00:59.570 of it like this if you retire and the stock market 00:00:59.570 --> 00:01:02.030 decides to have a wobble in the first two or 00:01:02.030 --> 00:01:04.769 three years it can be a disaster if you draw 00:01:04.769 --> 00:01:07.790 down pot and that's because you may be forced 00:01:07.790 --> 00:01:09.890 to sell your investments when the prices are 00:01:09.890 --> 00:01:13.370 low just to pay your gas bill or buy the groceries 00:01:13.370 --> 00:01:16.810 now those investments never get the chance to 00:01:16.810 --> 00:01:20.069 grow back it's like chopping down a young tree 00:01:20.069 --> 00:01:22.250 for firewood instead of just letting it grow 00:01:22.250 --> 00:01:25.579 into a forest and with an annuity You don't care 00:01:25.579 --> 00:01:27.879 if the market crashes on day one, the cheque 00:01:27.879 --> 00:01:32.980 still clears. In drawdown, a bad start can haunt 00:01:32.980 --> 00:01:37.060 you for 30 years. The second point is what professionals 00:01:37.060 --> 00:01:40.500 call longevity risk, or what I call the survival 00:01:40.500 --> 00:01:43.099 surcharge. Now, in every other part of life, 00:01:43.299 --> 00:01:46.239 being healthy, having good genes is a blessing. 00:01:46.379 --> 00:01:50.000 But in drawdown, it's a financial risk. The better 00:01:50.000 --> 00:01:52.719 your health, the more likely you are. To run 00:01:52.719 --> 00:01:56.120 out of money before you pass. Now if you're 65 00:01:56.120 --> 00:01:59.760 and looking at a 30 year retirement. That's a 00:01:59.760 --> 00:02:03.640 long time for things to go wrong. Now the irony 00:02:03.640 --> 00:02:08.060 is that the healthier you feel. The more you 00:02:08.060 --> 00:02:10.520 might find yourself checking your bank balance 00:02:10.520 --> 00:02:13.800 with a bit of a frown. You might be wondering 00:02:13.800 --> 00:02:18.259 have I got enough to make it to 95? Now an annuity 00:02:18.259 --> 00:02:21.159 turns your health into an asset that. The longer 00:02:21.159 --> 00:02:25.240 you live, the more of the insurance company's 00:02:25.240 --> 00:02:37.240 money you get to spend. But this third point 00:02:37.240 --> 00:02:43.419 is my biggest worry. It's behavioural risk. It's 00:02:43.419 --> 00:02:47.860 what I call the invisible handbrake. There's 00:02:47.860 --> 00:02:50.580 a psychological quirk called mental accounting. 00:02:50.919 --> 00:02:54.099 When your money's in the pot, your brain sees 00:02:54.099 --> 00:02:58.500 it as capital. It's your savings. But every time 00:02:58.500 --> 00:03:01.599 you take out money for a nice dinner or a trip 00:03:01.599 --> 00:03:04.280 to see the grandkids, your brain registers it 00:03:04.280 --> 00:03:09.500 as a loss. I've seen it happen too often. People 00:03:09.500 --> 00:03:11.960 have plenty of money and draw down, but they 00:03:11.960 --> 00:03:15.740 stop spending. They stop going on holiday. They 00:03:15.740 --> 00:03:21.169 act... whore and this is because they're terrified 00:03:21.169 --> 00:03:23.949 of watching that number on the screen getting 00:03:23.949 --> 00:03:27.189 smaller they've got the money but they don't 00:03:27.189 --> 00:03:31.189 have the internal permission to spend it they 00:03:31.189 --> 00:03:34.310 end up living a smaller life than they have to 00:03:34.310 --> 00:03:37.969 only to leave a massive pot of money to the taxman 00:03:37.969 --> 00:03:42.710 and the kids and they're gone that's not a successful 00:03:42.710 --> 00:03:46.409 retirement That's just being a stressed out caretaker 00:03:46.409 --> 00:03:52.129 for a bank account. This is why I'm such a fan 00:03:52.129 --> 00:03:55.550 of what I call the bills and thrills approach. 00:03:55.789 --> 00:03:59.389 Now, if you use a smaller part of your pot to 00:03:59.389 --> 00:04:03.050 buy an annuity, which when added to your state 00:04:03.050 --> 00:04:07.090 pension covers your bills, the essentials, it 00:04:07.090 --> 00:04:10.509 releases that invisible handbrake. You know the 00:04:10.509 --> 00:04:13.789 lights will stay on no matter what. Suddenly, 00:04:13.849 --> 00:04:18.329 your drawdown pot becomes the thrills fund because 00:04:18.329 --> 00:04:22.709 the essentials, the guaranteed, you can finally 00:04:22.709 --> 00:04:26.350 give yourself permission to actually spend the 00:04:26.350 --> 00:04:30.230 rest. So I'm going to ask you to be honest with 00:04:30.230 --> 00:04:34.029 yourself. Are you the type of person who can 00:04:34.029 --> 00:04:37.709 watch the market drop 10 % and not cancel your 00:04:37.709 --> 00:04:42.300 holiday plans? If not, Drawdown might be a trap 00:04:42.300 --> 00:04:47.660 for you. Don't let the freedom of Drawdown turn 00:04:47.660 --> 00:04:51.800 into a 20 -year prison of worry. I've been chatting 00:04:51.800 --> 00:04:54.620 to quite a few of you recently over email and 00:04:54.620 --> 00:04:57.519 there's one question that does pop up quite a 00:04:57.519 --> 00:05:01.120 lot. And it's that big final decision. Do I go 00:05:01.120 --> 00:05:04.920 for Drawdown or buy an annuity? It's often framed 00:05:04.920 --> 00:05:08.319 like a kind of red pill, blue pill type situation. 00:05:08.939 --> 00:05:12.360 one is supposedly about freedom and the other 00:05:12.360 --> 00:05:15.379 is basically a rip -off but i want to have a 00:05:15.379 --> 00:05:18.819 look and show you why that's potentially a healthy 00:05:18.819 --> 00:05:21.699 way to look at it now if we use a bit of common 00:05:21.699 --> 00:05:24.600 sense we'll see that for most of us the answer 00:05:24.600 --> 00:05:27.639 isn't just one or the other it's actually potentially 00:05:27.639 --> 00:05:33.019 about both so let's break it down now in plain 00:05:33.019 --> 00:05:35.540 english draw that is when you keep your money 00:05:35.540 --> 00:05:38.329 in a pot keep it invested and take it out when 00:05:38.329 --> 00:05:41.269 you need now you're then in the driver's seat 00:05:41.269 --> 00:05:43.730 but you're also the one who worries if the stock 00:05:43.730 --> 00:05:47.290 market has a bad week and you is t is basically 00:05:47.290 --> 00:05:50.470 a swap you give the insurance company some or 00:05:50.470 --> 00:05:53.050 all of your pension pot and they promise to pay 00:05:53.050 --> 00:05:56.709 you a set amount every month until the day you 00:05:56.709 --> 00:06:00.810 leave this mortal coil but rain or shine the 00:06:00.810 --> 00:06:05.339 money always arrives now for years annuities 00:06:05.339 --> 00:06:08.699 had a bad reputation rates were low and it felt 00:06:08.699 --> 00:06:12.399 like you were giving away your hard earned cash 00:06:12.399 --> 00:06:16.160 but things have changed rates are the best they've 00:06:16.160 --> 00:06:20.240 been in about a decade but more importantly what 00:06:20.240 --> 00:06:30.000 about the psychology of it all so this is where 00:06:30.000 --> 00:06:37.800 for some a hybrid approach works add up all your 00:06:37.800 --> 00:06:40.259 essential bills you counter tax the heating the 00:06:40.259 --> 00:06:42.959 big food shop you look at your state pension 00:06:42.959 --> 00:06:47.259 and then if there's a gap you use a portion of 00:06:47.259 --> 00:06:50.740 your pension to buy a smaller annuity to cover 00:06:50.740 --> 00:06:54.819 the gap now your bills are paid for life as guaranteed 00:06:54.819 --> 00:07:00.160 then there's the thrills that's the rest of your 00:07:00.160 --> 00:07:04.180 money and it stays in drawdown this is your fun 00:07:04.180 --> 00:07:06.540 money since your bills are already covered you 00:07:06.540 --> 00:07:09.480 can actually enjoy this money if the market goes 00:07:09.480 --> 00:07:13.060 down you might skip a fancy dinner but you're 00:07:13.060 --> 00:07:17.819 not going to lose the house so let's have a look 00:07:17.819 --> 00:07:21.759 at sarah and imagine the example she's got 500 00:07:21.759 --> 00:07:25.740 000 pound pot and wants 35 000 pound a year and 00:07:25.740 --> 00:07:28.100 instead of putting it all in one basket she uses 00:07:28.100 --> 00:07:31.500 a bit by annuity that combined with a state pension 00:07:31.500 --> 00:07:36.000 covers all the basic bills The rest stays invested. 00:07:36.339 --> 00:07:40.379 Now Sarah can sleep at night because the floor 00:07:40.379 --> 00:07:44.279 is solid. But she has this big pot of money for 00:07:44.279 --> 00:07:47.139 the grandkids or potentially a cruise or something. 00:07:47.379 --> 00:07:53.319 That's not a gamble. That's a system. Now the 00:07:53.319 --> 00:07:57.980 three things I say for choosing annuities. Don't 00:07:57.980 --> 00:08:01.110 take the first poop. Your own pension provider 00:08:01.110 --> 00:08:03.490 might not give you the best deal. Shop around. 00:08:03.709 --> 00:08:06.629 It could mean an extra £1 ,000 a year for life. 00:08:07.550 --> 00:08:10.870 Also, tell them about your health. This is the 00:08:10.870 --> 00:08:14.149 one time it actually pays to be unhealthy. Now, 00:08:14.170 --> 00:08:17.410 if you smoke or are at high blood pressure, then 00:08:17.410 --> 00:08:20.629 tell them. They might give you an enhanced annuity. 00:08:21.209 --> 00:08:24.709 And this pays out more because your life expectancy 00:08:24.709 --> 00:08:28.290 is slightly lower. Also, think about your partner. 00:08:28.370 --> 00:08:32.360 Consider a... Joint life options. So the money 00:08:32.360 --> 00:08:34.960 keeps coming in for your spouse if you go first. 00:08:37.299 --> 00:08:40.039 Retirement, you know, shouldn't be a 20 -year 00:08:40.039 --> 00:08:42.500 algebra exam that you're terrified of failing. 00:08:42.779 --> 00:08:46.179 It's about balance. Use the annuity for certainty. 00:08:46.639 --> 00:08:50.399 Use the drawdown for opportunity. What do you 00:08:50.399 --> 00:08:54.100 think? Drawdown early? Put the lot in annuity? 00:08:54.299 --> 00:08:56.000 What do you think? Let me know in the comments. 00:08:56.379 --> 00:08:58.200 Thanks for listening. See you next time.