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How taxes impact the choice between an annuity and the lump sum at retirement

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  • Bütler, Monika
  • Ramsden, Alma

Abstract

We analyze the role of taxation in individual annuitization decisions in an environment that shows large di?erences in relative taxation between the one-o? lump sum payment and the life-long annuity. For each individual whose retirement choice is recorded in an administrative dataset from a large Swiss pension fund we impute taxes for both options. We show that taxes can explain a signi?cant part of the variation in annuity rates. Exploiting kinks in the tax schedule we also ?nd evidence for tax optimization strategies by individuals. Our ?ndings suggest that individuals react strongly to tax incentives when making retirement choices.

Suggested Citation

  • Bütler, Monika & Ramsden, Alma, 2017. "How taxes impact the choice between an annuity and the lump sum at retirement," Economics Working Paper Series 1701, University of St. Gallen, School of Economics and Political Science.
    • Handle: RePEc:usg:econwp:2017:01
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    References listed on IDEAS

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    8. Brülhart, Marius & Parchet, Raphaël, 2014. "Alleged tax competition: The mysterious death of bequest taxes in Switzerland," Journal of Public Economics, Elsevier, vol. 111(C), pages 63-78.
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    Cited by:

    1. David Gallusser & Matthias Krapf, 2022. "Joint Income-Wealth Inequality: Evidence from Lucerne Tax Data," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 163(1), pages 251-295, August.
    2. Isabel Z. Martínez & Emmanuel Saez & Michael Siegenthaler, 2021. "Intertemporal Labor Supply Substitution? Evidence from the Swiss Income Tax Holidays," American Economic Review, American Economic Association, vol. 111(2), pages 506-546, February.
    3. Kurt Schmidheiny, 2017. "Emerging Lessons from Half a Century of Fiscal Federalism in Switzerland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 153(II), pages 73-101, June.
    4. Griselda Deelstra & Pierre Devolder & Roberta Melis, 2021. "Optimal annuitisation in a deterministic financial environment," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(1), pages 161-175, June.
    5. Christine Lewis & Patrice Ollivaud, 2020. "Policies for Switzerland’s ageing society," OECD Economics Department Working Papers 1600, OECD Publishing.

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    More about this item

    Keywords

    Annuity Puzzle; Taxation; Occupational Pension;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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