Business

Don’t get caught out by your good health

Comedian Dave Allen once said that if he could know one thing, he’d like to know the place where he was going to die
Comedian Dave Allen once said that if he could know one thing, he’d like to know the place where he was going to die Comedian Dave Allen once said that if he could know one thing, he’d like to know the place where he was going to die

DAVE Allen once said that if he could know one thing, he’d like to know the place where he was going to die.

Someone asked him why, and he said “I wouldn’t go there.”

Well, it’s even more important to know when you are going to die, and I’ll tell you why.

In my sentimental moments – and there are many these days, my past is getting longer – I think back to the heady times when retiring on your pension was just a matter of buying an annuity, the policy that turns your savings into a guaranteed monthly income for life.

Sometimes, a tear wells up in my eye as I think of those happy days – things were, as that annoying rat-like creature on the TV says, ‘Simples’.

That all changed with the introduction of new pension freedoms on April 6, 2015. Suddenly you could dip into – or ‘draw down’ – some or even all of your pension savings, to do with them as you will: buy the red sports car, go on the world cruise, see the cricket in South Africa, or re-invest the money for continued growth.

For some years now we are no longer compelled to buy an annuity, the government made much of how they were trusting us to be grown-ups and manage our own retirement cash.

However, have you spotted the big difference between the annuity and the drawdown scenarios? Yup, you got it. Somewhere along the way, the guarantee went missing. With an annuity, you are guaranteed a monthly income for life; with drawdown, you are at the mercy of your own investment decisions. If you act without advice, it’s Russian roulette with no guarantee included.

This is why it’s crucial to know what the reality of your retirement will be. How much will I need? How will my life have changed? Will I have medical costs, need healthcare? What lifestyle do I want, compared to what I have today?

Before even talking about all that, however, there is an elephant in the room. It’s a bigger, less obvious question: how long will I need it for? In other words, how long am I likely to live, after I finish work?

The Office for National Statistics (for which I have a season ticket) has just published some juicy new figures for the most common way of calculating your life expectancy. That is to predict the average life expectancy of a new baby at birth. For a boy, it’s now 79, and for a girl it’s 83.

But beware! These are dangerous figures, because of that little word ‘average’. The ‘average’ includes premature deaths though sickness, accidents, and suicides, and so for most of us is significantly skewed. The fact is, if you get to 65 without being struck by lightning or run over by Prince Philip, you stand a good chance of living far beyond these average ages.

The ONS says if you do make it to 65, you can expect to live to 84 as a man or 86 as a woman – a good bit longer than the averages, and a third longer than what you might have been expecting from the ‘longevity at birth’ figures.

This is important if you go for drawdown, where you are managing your own risk and capital growth. You could end up still hale and hearty at 79 or 83, but running low on money as you sigh ‘I should have listened to that smart Kennedy fella in the paper.’

The other mistake you can make is gauging your own lifespan based on your parents and grandparents. With better medicines and lifestyles, we are growing more long-lived with each generation.

One touchstone figure is the fact that life expectancy for a man 100 years ago was just 60.

Even over the past two generations, it’s all changed. A man who turned 65 in the mid-1980s (says the ONS) was expected to live to 78; in just 30 years, that has risen to 84. A woman of 65 in the 80s was expected to live to 82 – now it’s 86. We are getting healthier – they call us ‘the wellderly’.

There are also wide regional differences – over in Britain for instance, people in affluent areas of London, such as Chelsea, live around six years longer than people in Manchester. (I’d like to feel it had to do with your football team ... but it’s more likely connected to lifestyle.)

I hope you can see that, if we favour the drawdown route, taking cash out of your pension when you retire, we need to sit down with a financial adviser who can clearly work out how long our retirement may be – only then can we know how much we will need, which will in turn reveal how much we should be putting away today.

And if you like the security of guarantees, and so you might go for an annuity (or a combination of the annuity and drawdown), we can help you find the best type of annuity for you, and then ‘shop around’ to get you the best deal. For example, if you have an unhealthy lifestyle, maybe as a smoker, we can get you a higher income via an ‘enhanced annuity’, based on the cheerful premise that you’re unlikely to be around as long as a healthier person of your age (and with the cost of a packet of fags these days, you can use every penny you can get).

Don’t get caught out by your rude good health. Let us do the numbers for you, to make sure your pension will last all your days.

:: Michael Kennedy and Shaun Doherty are independent financial advisers and pensions specialists, and can be contacted on 028 71886005 . Further information is available on the Facebook page 'Kennedy Independent Financial Advice Ltd' or the website www.mkennedyfinancial.com