Annuity choices and income drawdown: evidence from the decumulation phase of defined contribution pensions in England

Banks, James; Crawford, Rowena; Tetlow, Gemma

doi:10.1017/s1474747215000256

Cited by 34 publications

(31 citation statements)

References 23 publications

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“…Withdrawal of large lump sums at one time can also have nontrivial tax implications that consumers need to know and correctly take into account in their financial planning (West, ). Our results show that lump‐sum takers tended to have higher pension freedom‐related knowledge, confirming earlier findings about the significant role of financial literacy for navigating the complex annuity‐related financial decisions late in life (Banks, Crawford, & Tetlow, ). This finding further suggests that lump‐sum takers gathered information about financial consequences of taking advantage of the Pension Freedom regulation rather than making this decision impulsively.…”

Section: Discussionsupporting

confidence: 89%

Pension Freedom Day in the United Kingdom: Early evaluation of consumer response

Loibl

Summers

McNair

et al. 2018

Int J Consumer Studies

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Understanding decumulation decisions in retirement is an important component of public policy that influences pension regulations in aging societies. This research examined a recent, substantial change to pension regulation in the United Kingdom: the newly established flexibility to obtain a lump‐sum payout from personal or occupational pension savings. Conducting an online survey of individual’s eligible to take advantage of the Pension Freedom regulation, we find that almost half of study participants plan to obtain a lump‐sum payout, on average £33,741, intending it for an average of three different investments or purchases. The decision to obtain a lump‐sum withdrawal was related to better knowledge of the new regulation. It was also more likely among older respondents and those not worried about a decline in standard of living during retirement. Dispositional measures did not affect the lump‐sum decision. Close to one‐third of study participants still planned to invest retirement savings into an annuity, especially those who retire at a later age, have concerns about care costs and worry about decline in standard of living in retirement. Comments about the changes to pension regulation were slightly more positive than negative. From our analysis of the effect of the Pension Freedom regulation on savings decumulation decisions, we conclude that the new Pension Freedom regulations do meet consumer demands, and demonstrate that pension knowledge and retirement expectations, in particular, influence consumer evaluations. We further conclude that annuity investments continue to play a role for older adults in the United Kingdom, especially for those concerned about meeting financial needs during retirement.

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Section: Discussionsupporting

confidence: 89%

Pension Freedom Day in the United Kingdom: Early evaluation of consumer response

Loibl

Summers

McNair

et al. 2018

Int J Consumer Studies

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“…() (for the main sample) and Hagen () do not find dependencies between the bequest motive and annuitization rates, whereas Banks et al. () observe a positive correlation. Even though the scarce experimental research supports the findings from theoretical analyses, theoretical models do not yet seem to be able to properly account for the empirically observed bequest motive.…”

Section: Three Aspects Of Annuitization Decisionsmentioning

confidence: 84%

“…Other sources of retirement income and preannuitized wealth, in the form of social security benefits, private annuities or DB plans, have mostly been shown to have a strictly negative impact on the demand for private annuities, which can be explained by the fact that statutory pensions are often seen as substitutes for private annuities. Some articles, however, observe a positive dependency between this factor and annuitization, and argue that this effect can be caused, for example, by high loadings in private annuity markets (Pang and Warshawsky, ), by a high minimum consumption floor provided by the government (Pashchenko, ), or by a possibly unobserved heterogeneity of the sample (Banks et al., ). Finally, Guillemette et al.…”

Section: Three Aspects Of Annuitization Decisionsmentioning

confidence: 99%

What Do We Know About Annuitization Decisions?

Alexandrova¹,

Gatzert²

2019

Risk Manage Insurance Review

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Against the background of aging societies and increasing life expectancies, the protection of individuals from outliving their savings has become increasingly relevant. Annuities represent insurance against longevity risk and can prevent old‐age poverty. The aim of this article is to present the current state of theoretical, empirical and experimental evidence with regard to annuitization decisions. Toward this end, we conduct a systematic literature review that includes 89 articles. Based on this, we study welfare effects of mandatory annuitization, annuitization rates and the optimal fraction of wealth to be annuitized, as well as determinants of retirees’ choice to annuitize and their impact on annuity demand. Finally, we present possible solutions for overcoming the low uptake of annuities based on its causes. One main result is that behavioral biases in annuitization decisions particularly require considerably more theoretical research and empirical evidence, and that theoretical models already appear to well explain empirically observed annuitization rates.

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“…For example, Shen et al (2016) document for Taiwan that individuals with higher levels of financial literacy are less likely to engage in financial disputes. Banks et al (2015) find for the U.K. that financial literacy and numeracy are significantly positively related to individuals' propensity to shop around for an annuity when receiving funds from their defined contribution pensions. In an early contribution to the literature, Hilgert et al (2003) find a strong correlation between financial sophistication and day-to-day financial management skills such as cash-flow and credit management.…”

Section: Additional Evidencementioning

confidence: 89%

Financial literacy, financial advice, and financial behavior

2017

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In this survey, we review the voluminous body of literature on the measurement and the determinants of financial literacy. Wherever possible, we supplement existing findings with recent descriptive evidence of German households' financial literacy levels based on the novel Panel on Household Finances dataset, a large-scale survey administered by the Deutsche Bundesbank and representative of the financial situation of households in Germany. Prior research not only documents generally low levels of financial literacy but also finds large heterogeneity in financial literacy across the population, suggesting that economically vulnerable groups are placed at further disadvantage by their lack of financial knowledge. In addition, we assess the literature evaluating financial education as a means to improve financial literacy and financial behavior. Our survey suggests that the evidence with respect to the effectiveness of the programs is rather disappointing. We also review the role of individuals' financial literacy for the use of professional financial advice and assess whether expert intervention can serve as a substitute to financial literacy. We conclude by discussing several directions for future research.

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Annuity choices and income drawdown: evidence from the decumulation phase of defined contribution pensions in England

Cited by 34 publications

References 23 publications

Pension Freedom Day in the United Kingdom: Early evaluation of consumer response

Pension Freedom Day in the United Kingdom: Early evaluation of consumer response

What Do We Know About Annuitization Decisions?

Financial literacy, financial advice, and financial behavior

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