Suboptimality of Immediate Annuitization in Private Pension Schemes

• Published in: Ekonomický časopis Vol. 64; no. 2; pp. 169 - 190
• Main Authors: Šebo, Ján, Šebová, Ľubica
• Format: Journal Article
• Language: English
• Published: Ekonomický ústav SAV a Prognostický ústav SAV 2016; Institute of Economic Research of the SAS and Institute for Forecasting SAS (co-publisher)
• Subjects: Financial Markets; National Economy; Welfare systems; private DC pension; programmed withdrawal; annuity; information asymmetry
• ISSN: 0013-3035

Immediate annuitisation as a strategy for a welfare maximization for a payout phase in private pension schemes has been widely criticized. We examine the self-annuitisation strategies under two different consumption rates using programmed withdrawal compared to the immediate annuitization for a retired individual subject to uncertain portfolio returns and longevity risk. The aim is to examine the utility of both approaches under the existence of longevity risk on one side and bequest on the other. Results could serve as a basis for further discussion on improving the legislature on pay-out phase in Slovak private DC pension pillar.