Hey everyone, Eric here from Time to Retire.
Thanks for joining me again. Now if you've been
watching the channel for a while you will know
that I am a big fan of the flexibility of drawdown
for your pension. Now I love the idea of keeping
the money in my own pocket and having that freedom.
But today let's take another angle on this. We
often hear that annuities are old -fashioned
but for some of us drawdown can actually be a
psychological nightmare. There are three big
risks that I want to talk about that every UK
retiree needs to hear because it's not just about
the maths it's actually about your peace of mind.
So the first one is what professionals call the
sequence of returns risk but let's you and I
just call it the early bad luck factor. now think
of it like this if you retire and the stock market
decides to have a wobble in the first two or
three years it can be a disaster if you draw
down pot and that's because you may be forced
to sell your investments when the prices are
low just to pay your gas bill or buy the groceries
now those investments never get the chance to
grow back it's like chopping down a young tree
for firewood instead of just letting it grow
into a forest and with an annuity You don't care
if the market crashes on day one, the cheque
still clears. In drawdown, a bad start can haunt
you for 30 years. The second point is what professionals
call longevity risk, or what I call the survival
surcharge. Now, in every other part of life,
being healthy, having good genes is a blessing.
But in drawdown, it's a financial risk. The better
your health, the more likely you are. To run
out of money before you pass. Now if you're 65
and looking at a 30 year retirement. That's a
long time for things to go wrong. Now the irony
is that the healthier you feel. The more you
might find yourself checking your bank balance
with a bit of a frown. You might be wondering
have I got enough to make it to 95? Now an annuity
turns your health into an asset that. The longer
you live, the more of the insurance company's
money you get to spend. But this third point
is my biggest worry. It's behavioural risk. It's
what I call the invisible handbrake. There's
a psychological quirk called mental accounting.
When your money's in the pot, your brain sees
it as capital. It's your savings. But every time
you take out money for a nice dinner or a trip
to see the grandkids, your brain registers it
as a loss. I've seen it happen too often. People
have plenty of money and draw down, but they
stop spending. They stop going on holiday. They
act... whore and this is because they're terrified
of watching that number on the screen getting
smaller they've got the money but they don't
have the internal permission to spend it they
end up living a smaller life than they have to
only to leave a massive pot of money to the taxman
and the kids and they're gone that's not a successful
retirement That's just being a stressed out caretaker
for a bank account. This is why I'm such a fan
of what I call the bills and thrills approach.
Now, if you use a smaller part of your pot to
buy an annuity, which when added to your state
pension covers your bills, the essentials, it
releases that invisible handbrake. You know the
lights will stay on no matter what. Suddenly,
your drawdown pot becomes the thrills fund because
the essentials, the guaranteed, you can finally
give yourself permission to actually spend the
rest. So I'm going to ask you to be honest with
yourself. Are you the type of person who can
watch the market drop 10 % and not cancel your
holiday plans? If not, Drawdown might be a trap
for you. Don't let the freedom of Drawdown turn
into a 20 -year prison of worry. I've been chatting
to quite a few of you recently over email and
there's one question that does pop up quite a
lot. And it's that big final decision. Do I go
for Drawdown or buy an annuity? It's often framed
like a kind of red pill, blue pill type situation.
one is supposedly about freedom and the other
is basically a rip -off but i want to have a
look and show you why that's potentially a healthy
way to look at it now if we use a bit of common
sense we'll see that for most of us the answer
isn't just one or the other it's actually potentially
about both so let's break it down now in plain
english draw that is when you keep your money
in a pot keep it invested and take it out when
you need now you're then in the driver's seat
but you're also the one who worries if the stock
market has a bad week and you is t is basically
a swap you give the insurance company some or
all of your pension pot and they promise to pay
you a set amount every month until the day you
leave this mortal coil but rain or shine the
money always arrives now for years annuities
had a bad reputation rates were low and it felt
like you were giving away your hard earned cash
but things have changed rates are the best they've
been in about a decade but more importantly what
about the psychology of it all so this is where
for some a hybrid approach works add up all your
essential bills you counter tax the heating the
big food shop you look at your state pension
and then if there's a gap you use a portion of
your pension to buy a smaller annuity to cover
the gap now your bills are paid for life as guaranteed
then there's the thrills that's the rest of your
money and it stays in drawdown this is your fun
money since your bills are already covered you
can actually enjoy this money if the market goes
down you might skip a fancy dinner but you're
not going to lose the house so let's have a look
at sarah and imagine the example she's got 500
000 pound pot and wants 35 000 pound a year and
instead of putting it all in one basket she uses
a bit by annuity that combined with a state pension
covers all the basic bills The rest stays invested.
Now Sarah can sleep at night because the floor
is solid. But she has this big pot of money for
the grandkids or potentially a cruise or something.
That's not a gamble. That's a system. Now the
three things I say for choosing annuities. Don't
take the first poop. Your own pension provider
might not give you the best deal. Shop around.
It could mean an extra £1 ,000 a year for life.
Also, tell them about your health. This is the
one time it actually pays to be unhealthy. Now,
if you smoke or are at high blood pressure, then
tell them. They might give you an enhanced annuity.
And this pays out more because your life expectancy
is slightly lower. Also, think about your partner.
Consider a... Joint life options. So the money
keeps coming in for your spouse if you go first.
Retirement, you know, shouldn't be a 20 -year
algebra exam that you're terrified of failing.
It's about balance. Use the annuity for certainty.
Use the drawdown for opportunity. What do you
think? Drawdown early? Put the lot in annuity?
What do you think? Let me know in the comments.
Thanks for listening. See you next time.