Retirement bridge helps to solve annuity dilemma

A new approach to retirement income could boost an employee’s annual income by up to a quarter, according to research from fund manager AllianceBernstein.

The study revealed confusion among consumers approaching retirement and those who have just retired about how best to secure their income.

“Most retirees face an impossible choice between an annuity they don’t need and a traditional income drawdown product they can’t afford,” said David Hutchins, head of UK DC investments at AllianceBernstein. “As a result, up to £10 billion of pension benefits a year is being nudged into the wrong product.”

Recent research from the National Association of Pension Funds shows most people do not choose the product that best suits their needs, yet the most common annuities purchased offer no protection against inflation or offer provision for dependants.

The retirement bridge is a low-cost, low-risk income drawdown product based on the age-related target date funds at the core of AllianceBernstein’s investment proposition.

Removing the need for people to annuitise at the point of retirement will give them more time to understand their needs before committing to an annuity purchase that cannot be reversed. In typical markets, this approach would provide almost 20% extra income if the person annuitised at age 75, but historically low annuity rates could increase that to more than 25% compared with annuitising at age 65 today.

Tim Banks, head of DC sales and client relations at AllianceBernstein, said: “The industry has devoted a lot of time and resources to devising ways of accumulating a pension pot during people’s working lives, but little thought has gone into what happens after a saver retires.

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“With auto-enrolment possibly bringing millions of new savers into DC pensions, it is critical new approaches are introduced to give savers access to more flexible and user-friendly ways to provide retirement income.”

Read more from the Workplace Savings Quarterly