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The Science of Flexible Retirement Choices: Switching Retirement Savings into an Annuity

Posted: 25 Apr 2023

See all articles by Andrew Clare

Andrew Clare

City, University of London - Bayes Business School

James Seaton

City University London - The Business School

Peter N. Smith

University of York - Department of Economics and Related Studies; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Steve Thomas

City University London - The Business School

Date Written: April 18, 2023

Abstract

In this paper we consider the choice that retirees might make between drawing down from their pension pot and the purchase of an annuity. A key finding of our research that in a world of ‘loss aversion’, across a very wide range of assumptions, there is almost always a ‘crossover point’ during retirement at which moving out of drawdown into an annuity can be the optimal strategy. This suggests that the pensions industry should investigate the construction of a hybrid, ‘flex-first, fix-later’ pension product. We show that a ‘hybrid’ approach can produce much higher levels of happiness, especially at older ages, than staying wholly in drawdown or from buying an annuity at the point of retirement.

Keywords: Sequence Risk; Longevity Risk, Withdrawal Risk, Delayed Annuities, Adaptive Withdrawals, Residual Sum

JEL Classification: G10, G11, G22

Suggested Citation

Clare, Andrew D. and Seaton, James and Smith, Peter N. and Thomas, Stephen H., The Science of Flexible Retirement Choices: Switching Retirement Savings into an Annuity (April 18, 2023). Available at SSRN: https://ssrn.com/abstract=4422579 or http://dx.doi.org/10.2139/ssrn.4422579

Andrew D. Clare

City, University of London - Bayes Business School ( email )

106, Bunhill Row
London, EC1Y 8TZ
United Kingdom

James Seaton

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Peter N. Smith (Contact Author)

University of York - Department of Economics and Related Studies ( email )

Heslington
York 010 5DD
United Kingdom
+44 1904 433 765 (Phone)
+44 1904 433 759 (Fax)

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Stephen H. Thomas

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 (0) 20 7040 5271 (Phone)
+44 (0) 20 7040 8881 (Fax)

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