Income Drawdown Schemes for a Defined-Contribution Pension Plan

23 Pages Posted: 5 Aug 2008

See all articles by Paul Emms

Paul Emms

King's College London

Steven Haberman

City University London - Faculty of Actuarial Science

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Abstract

In retirement a pensioner must often decide how much money to withdraw from a pension fund, how to invest the remaining funds, and whether to purchase an annuity. These decisions are addressed here by introducing a number of income drawdown schemes, which are relevant to a defined-contribution personal pension plan. The optimal asset allocation is defined so that it minimizes the expected loss of the pensioner as measured by the performance of the pension fund against a benchmark. Two benchmarks are considered: a risk-free investment and the price of an annuity. The fair-value income drawdown rate is defined so that the fund performance is a martingale under the objective measure. Annuitization is recommended if the expected fair-value drawdown rate falls below the annuity rate available at retirement. As an illustration, the annuitization age is calculated for a Gompertz mortality distribution function and a power law loss function.

Suggested Citation

Emms, Paul and Haberman, Steven, Income Drawdown Schemes for a Defined-Contribution Pension Plan. Journal of Risk & Insurance, Vol. 75, Issue 3, pp. 739-761, September 2008. Available at SSRN: https://ssrn.com/abstract=1202450 or http://dx.doi.org/10.1111/j.1539-6975.2008.00282.x

Paul Emms (Contact Author)

King's College London ( email )

Strand
London, England WC2R 2LS
United Kingdom

Steven Haberman

City University London - Faculty of Actuarial Science ( email )

London
United Kingdom

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