Optimal Annuity Purchases for Australian Retirees

Abstract

We develop and simulate a stochastic lifecycle model to investigate optimal annuity purchases at retirement. Retirees can invest in risky assets, purchase fairly priced immediate or deferred lifetime annuities, and are eligible for a targeted safety net pension. We match baseline parameters to current Australian settings and conduct scenario analyses over a wide range of individual preferences and financial market outcomes. Except where individuals need to insure a consumption floor, both immediate and deferred annuity purchases are largely crowded out by the means‐tested public pension. Welfare losses caused by zero annuitisation are small compared with the losses caused by completely annuitising all savings, particularly if wealth at retirement is low. Decumulation policy should ensure individuals are well informed of the insurance value of annuities and accommodate diverse choices.

What Dividend Imputation Means for Retirement Savers

“…Examples include Khemka and Butt (2017), who consider the effect of the distribution of Australian returns on optimal portfolio choice. Other life-cycle modelling in an Australian context includes Iskhakov et al (2015), who address optimal annuity purchases; and Andreasson et al (2017), who examine the impact of age pension means testing on housing decisions. Other life-cycle modelling in an Australian context includes Iskhakov et al (2015), who address optimal annuity purchases; and Andreasson et al (2017), who examine the impact of age pension means testing on housing decisions.…”

“…The unique nature of the Australian age pension has led to related research, such as Hulley et al (2013), Ding (2014) and Andreasson and Shevchenko (2017). Other life-cycle modelling in an Australian context includes Iskhakov et al (2015), who address optimal annuity purchases; and Andreasson et al (2017), who examine the impact of age pension means testing on housing decisions. This paper is arranged as follows.…”

Superannuation in Australia: A Survey of the Literature

“…Australians fell in with the low uptake of longevity insurance purchases in most other developed countries (Mitchell et al, 2011). The longevity coverage offered by the Age Pension and weakened means-tests concessions to purchasers of longevity insurance have also dampened demand (Iskhakov et al 2015), to the point where the market was almost extinguished. In 2011, insurers sold fewer than 100 life annuities annually in Australia (Bateman & Piggott, 2011).…”

“…In 2011, insurers sold fewer than 100 life annuities annually in Australia (Bateman & Piggott, 2011). While sales of longevity products have increased from this low base over the past few years, the case for adding voluntary annuity purchases to Age Pension entitlements is still weak for the majority of retired households, and likely to remain so until average superannuation accumulations rise and consequently Age Pension payments fall (Iskhakov et al 2015). 14 Indeed, Australian retirees are likely to continue to lean towards high and continuing investment risk exposures for superannuation savings into the future.…”

“…Iskhakov et al . (, p.152). find that ‘compulsion would be very costly for less wealthy retirees who already receive the Age Pension, forcing them into safe, low return, longevity insured income streams where the marginal improvement in welfare does not compensate for the risky higher investment returns they have to forgo’(p.192).…”