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The implication of the hyperbolic discount model for the annuitisation decisions

Published online by Cambridge University Press:  07 February 2019

Anran Chen ,
Steven Haberman  and
Stephen Thomas
Anran Chen*
Affiliation:
Faculty of Actuarial Science and Insurance, Cass Business School, City, University of London, 106 Bunhill Row, LondonEC1Y 8TZ, UK
Steven Haberman
Affiliation:
Faculty of Actuarial Science and Insurance, Cass Business School, City, University of London, 106 Bunhill Row, LondonEC1Y 8TZ, UK
Stephen Thomas
Affiliation:
Faculty of Finance, Cass Business School, City, University of London, 106 Bunhill Row, LondonEC1Y 8TZ, UK
*
*Corresponding author. Email: [email protected]
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Abstract

The low demand for immediate annuities at retirement has been a long-standing puzzle. We show that a hyperbolic discount model can explain this behaviour and results in the attractiveness of long-term deferred annuities. With a set of benchmark assumptions, we find that retirees would be willing to pay a much higher price than the actuarial fair price for annuities with longer deferred periods. Moreover, if governments were to introduce a pre-commitment device which requires pensioners to make annuitisation decisions around 10 years before retirement, the take up rate of annuities could become higher.

Keywords

Annuity puzzledeferred annuitieshyperbolic discountingreservation priceG22J26D91
Type
Article
Information
Journal of Pension Economics & Finance , Volume 19 , Issue 3 , July 2020 , pp. 372 - 391
Copyright
Copyright © Cambridge University Press 2019

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