Annuity delay bridge to retirement promised land says Alliance Bernstein

Most retirees could benefit from delaying the purchase of an annuity, boosting their annual pension income by over 25 per cent at the age of 75, according to a new research paper from Alliance Bernstein.

The provider points to research that suggests that, in typical markets, its strategy, which it calls ‘Retirement Bridge’, would have provided nearly 20 per cent higher annual retirement income on eventual annuitisation at 75.

It claims that today, with annuity rates at an all-time low, its Retirement Bridge approach could enable pensioners to enjoy an improvement in annual retirement income of over 25 per cent on eventual annuitisation at 75, compared to an annuity bought by a 65-year-old retiree today.

The report proposes the Retirement Bridge as a new alternative to an annuity on retirement, which the provider says offers substantial benefits compared to the conventional approach – choice, flexibility, lower cost and growth potential.

Alliance Bernstein says the approach is a low-cost, low-risk, drawdown product based on a range of age-based, income-paying funds to which retirees transfer their money at retirement.

The provider’s figures are based on modeling of a 65-year-old couple, covering every rolling 10-year period from 1920 to 2012. The Retirement Bridge concept assumes a simple equity and bond strategy using AllianceBernstein’s Dynamic Asset Allocation approach from 1970. Annuity assumes purchase of level joint-life contract, with rates calculated using prevailing market conditions at the time and 2012 mortality tables, but with allowance for underpricing of longevity improvements, particularly in the period 2000–2003.

Independent research commissioned by the firm amongst groups of individuals approaching retirement, or who had just retired, showed confusion about the pension income options available and an appetite for more flexible ways of providing an income.

David Hutchins, head UK DC investments, Alliance Bernstein, says: “Most retirees face an impossible choice, between an annuity they don’t need and a traditional income drawdown product they can’t afford. As a result, up to £10 billion of pension benefits is being nudged into the wrong product each year. We believe it makes more sense to harness inertia and instead give people a “positive nudge” towards a more suitable form of retirement income.

“With life expectancy for a 65-year-old retiree having nearly doubled to just under 25 years since the 1980s, it makes no sense to be rushed into the wrong choice at the point of retirement.  We recommend individuals consider putting off buying an annuity until they have a clearer understanding of their lifestyle and income requirements in older age and make use of a Retirement Bridge to smooth the transition from working life.

“The National Association of Pension Funds (NAPF) recently found that most people are not choosing the right annuity at the point of retirement. But our findings raise more serious concerns about whether any kind of annuity is appropriate at that point.”