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The implication of the hyperbolic discount model for annuitisation decisions

Chen, A., Haberman, S. ORCID: 0000-0003-2269-9759 and Thomas, S. ORCID: 0000-0001-5438-4263 (2019). The implication of the hyperbolic discount model for annuitisation decisions. Journal of Pension Economics and Finance, doi: 10.1017/S1474747218000343

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 ten years before retirement, the take up rate of annuities could become higher.

Publication Type: Article
Additional Information: This article is published in a revised form in Journal of Pension Economics & Finance https://www.cambridge.org/core/journals/journal-of-pension-economics-and-finance. This version is free to view and download for private research and study only. Not for re-distribution, re-sale or use in derivative works. © copyright holder.
Publisher Keywords: Hyperbolic discounting, Deferred annuities, Annuity puzzle, Reservation price
Subjects: H Social Sciences > HG Finance
J Political Science > JN Political institutions (Europe) > JN101 Great Britain
Departments: Cass Business School > Actuarial Science & Insurance
Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/21116
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