This paper explores adverse selection in the voluntary and compulsory individual annuity markets in the United Kingdom. Two empirical regularities support standard models of adverse selection. First, annuitants are longer-lived than non-annuitants. These mortality differences are more pronounced in the voluntary than in the compulsory annuity market. We estimate that the amount of adverse selec...

The financial industry has recently seen a push away from structured products and towards transparency. The trend is to decompose products, such that customers understand each component as well as its price. Yet the enormous annuity market combining investment and longevity has been almost untouched by this development. We suggest a simple decomposed annuity structure that enables cost transpar...

We propose mortality salience – increased accessibility of death-related thoughts – as one previously unexplored explanation for the annuity puzzle, the low rate at which retirees buy annuities even though economists recommend annuities as an optimal decision. Across four studies we show that mortality salience decreases how likely individuals are to put savings into an annuity. By forcing cons...

The special tax treatment of UK pensions means that the decision on how to use pensions assets is more involved than in other tax jurisdictions. In particular, the ability to take up to 25% of pensions assets as a tax-free cash lump sum at retirement offers retirees opportunities to enhance their pension above that possible through the purchase of a compulsory purchase annuity (“CPA”). The tax-...

Life annuities provide a guaranteed income for the remainder of the recipient’s lifetime, and therefore, annuitization presents an important option when choosing an adequate investment strategy for the retirement ages. While there are numerous research articles studying annuities from a pensioner’s point of view, thus far there have been few contributions considering annuities from the provider...

We consider the choices available to a pension plan member at the time of retirement for conversion of his personal or defined contribution (DC) pension fund into a stream of income in retirement. In particular, we compare the purchase at retirement age of a conventional life annuity (that is, a bond-based investment) against a variety of programmes that involve differing exposures to equities ...

We illustrate how equilibrium screening models can be used to evaluate the economic consequences of insurance market regulation. We calibrate and solve a model of the United Kingdom's compulsory annuity market and examine the impact of gender-based pricing restrictions. We find that the endogenous adjustment of annuity contract menus in response to such restrictions can undo up to half of the r...