Flexible Pension Drawdown Risk Run Out Of Money

Video explores the new Flexible Pension Drawdown rules and the risk of running out of money if you do not plan wisely.

Transcript:

“Hello again, the time of shooting this video is the middle of October 2014. We’re all waiting with bated breath for the new pension flexibility laws to start next year. Even today, we’ve had the Chancellor of the Exchequer, George Osborne, publish additional details and flexibility about running your pension fund like a bank account. [And] I thought I would touch on a subject which, I speak to many clients about and it may help you. And that is: with these new flexible pension options starting next year, where you have the ability to draw down as much or as little of your pension fund as you wish, there is a real risk here of people running out of money.

What if I run out of my money? What if I spend all of my pension fund? How do I budget for that? [And] I think responsibility here lies with yourself, when we look at it very simplistically: let's say you need an income from your pension fund of £10,000 a year. Now, if you’ve built up pension funds before retirement of let's say £100,000 then it stands to reason that if I got £100,000 in my pension fund and I wish to withdraw £10,000 a year then there is a risk here of you running out of money after 10 years. If you keep drawing out £10,000 every year from £100,000 “duh, duh, duh, duh, duh”, it’s gradually going to go down. So there’s an element of forward planning on how much you believe you're going to need or require in retirement and indeed, we’re all guessing on life expectancy.

Right then, if you're 65 and your life expectancy is 85, that 20 years to fund for retirement. If you need £10,000 a year for 20 years, you need a pension fund at the start of at least £200,000. We also need to allow for ‘investment markets can rise as well as fall’. What if your pension fund is going down in value because you're not looking after it, you’re not taking regular investment advice but you still keep withdrawing your £10,000?

So these new pension flexibility rules, flexible drawdown, this has to be thought through. You have to plan it, either yourself if you wish to or with your financial adviser and plan for that risk of:

• What if my pension fund runs down?
• What if I run out of pension money?
• What if investment markets go down?
• What if I live longer than expected?

All of these factors have to be taken into account when planning for the new pension flexibility rules. [And] I would always urge caution to anybody. Always look at this as the drawdown route, the flexible pension route for retirement, is a higher risk retirement strategy which means you need to take more responsibility or indeed work with a financial adviser. And I don't just mean once every 10 years I meet on a regular basis because things change markets go up as well as down, one year you may need more money than another year.

I know there's a lot in the press of people rushing out and buying Porsches and Lamborghinis and Ferraris and I actually don't believe that's necessarily true. Most of us don't just go crazy and spend all of our money and then throw ourselves literally on the ‘slag heap’ and hope that somebody will look after us. But there is a realistic chance here, there will be people who don't think about their pension funds and they perhaps spend more because they’re younger in retirement may and they want to enjoy it and then have smaller amounts of pension income as we get older. [And] again that may be a sensible approach and with things like that talk to us as your financial adviser about cash flow modelling, about planning for:

• Well how much do I need in the early years?
• What would I like to spend?
• What would I then need in later years when perhaps I'm less mobile?

So pensions and pension flexibility and the new rules just be aware that there is a real, real risk of people running out of money.

[And] I always compare it to you having a car or me having my car. If you don't service your car, if you don't MOT your car, you can't keep driving it forever and hoping that it will still work. You may be lucky and it does [work], but the most people if they don't look after their car it is going to break down and that’s the same with our finances. Particularly in retirement where may be you given up work, if you're not regularly servicing your finances e.g. via our money MOT service, do you like that name the money MOT? You may run out of money.

You may have been better off going the low-risk option of buying an annuity, so these are important decisions that affect the rest of your life. So be aware that if you don't plan properly with the new pension flexible drawdown rules there is a real risk of people running out of money. [So} we need to plan it out properly, plan our budgets and plan our budgets for quite a few years and this will this will be a new experience for many people where they have much more control over their finances so you can control, you can draw down as much or as little as you want from your pension fund. But, you also need to think about the future.

[And] I am going to use a phrase that my wife and co-director a uses regularly, it was her phrase so I stole it from her and that is: “Live for today but with one eye on tomorrow”. So live for today and enjoy the pension fund that you worked hard for unsafe or but think about tomorrow as well.

Thank you very much for watching.”