Choosing the optimal annuitization time post retirement

In defined contribution pension schemes, the financial risk is borne by the member: contributions are fixed in advance and the benefits provided by the scheme depend on the investment performance experienced during the active membership and on the price of the annuity at retirement, in the case that the benefits are given in the form of an annuity. Therefore, the financial risk can be split into two parts: investment risk, during the accumulation phase, and annuity risk, focused at retirement. In order to limit the annuity risk — which is the risk that high annuity prices (driven by low bond yields) at retirement can lead to a lower than expected pension income — in many schemes the member has the possibility of deferring the annuitization of the accumulated fund. This possibility consists of leaving the fund invested in financial assets as in the accumulation phase, and allows for periodic withdrawals by the pensioner, until annuitization occurs (if ever). In UK this option is named “income drawdown option”, in US the periodic withdrawals are called ”phased withdrawals”.