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The effect of longevity drift and investment volatility on income sufficiency in retirement

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  • Mayhew, Les
  • Smith, David
  • Wright, Douglas

Abstract

In 2014 the Government announced radical proposals which now allow people to withdraw money from their pension pot from age 55, ‘how they want, subject to their marginal rate of income tax in that year’. The main effect of this change will be to put more onus on the individual to make sure they have sufficient resources to last for their retirement, but it also removes the obligation to annuitise their funds at any future age. This paper is concerned with how people can best use their pension pots by aligning them to their personal financial objectives and longevity risks. It finds that for most people annuitising is not the best option, except for a few circumstances, and that draw down is preferable, especially where there is a bequest motive and the individual has assets such as property to fall back on. These options are low risk if simple rules are followed but they are not a substitute for professional advice and should only be used in conjunction.

Suggested Citation

  • Mayhew, Les & Smith, David & Wright, Douglas, 2018. "The effect of longevity drift and investment volatility on income sufficiency in retirement," Insurance: Mathematics and Economics, Elsevier, vol. 78(C), pages 201-211.
    • Handle: RePEc:eee:insuma:v:78:y:2018:i:c:p:201-211
    DOI: 10.1016/j.insmatheco.2017.09.013
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    References listed on IDEAS

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    1. Les Mayhew & David Smith, 2014. "Gender Convergence in Human Survival and the Postponement of Death," North American Actuarial Journal, Taylor & Francis Journals, vol. 18(1), pages 194-216.
    2. Les Mayhew & Martin Karlsson & Ben Rickayzen, 2010. "The Role of Private Finance in Paying for Long Term Care," Economic Journal, Royal Economic Society, vol. 120(548), pages 478-504, November.
    3. Blake, David & Wright, Douglas & Zhang, Yumeng, 2014. "Age-dependent investing: Optimal funding and investment strategies in defined contribution pension plans when members are rational life cycle financial planners," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 105-124.
    4. Karlsson, Martin & Mayhew, Les & Rickayzen, Ben, 2007. "Long term care financing in four OECD countries: Fiscal burden and distributive effects," Health Policy, Elsevier, vol. 80(1), pages 107-134, January.
    5. Karlsson, Martin & Mayhew, Les & Rickayzen, Ben, 2007. "Long term care financing in 4 OECD countries: fiscal burden and distributive effects," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 34405, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    6. Karlsson, Martin & Mayhew, Les & Rickayzen, Ben, 2009. "Individualised life tables: investigating dynamics of health, work and cohabitation in the UK," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 34404, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    7. Les Mayhew & David Smith, 2014. "Personal Care Savings Bonds: A New Way of Saving Towards Social Care in Later Life*," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 39(4), pages 668-692, October.
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    Cited by:

    1. Blake, David & Cairns, Andrew J.G., 2021. "Longevity risk and capital markets: The 2019-20 update," Insurance: Mathematics and Economics, Elsevier, vol. 99(C), pages 395-439.

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