Income Drawdown Schemes for a Defined-Contribution Pension Plan |
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Authors: | Paul Emms Steven Haberman |
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Institution: | Paul Emms and Steven Haberman are from the Faculty of Actuarial Science and Insurance, Cass Business School, City University, London The author can be contacted via e-mail: |
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Abstract: | In retirement a pensioner must often decide how much money to withdraw from a pension fund, how to invest the remaining funds, and whether to purchase an annuity. These decisions are addressed here by introducing a number of income drawdown schemes, which are relevant to a defined-contribution personal pension plan. The optimal asset allocation is defined so that it minimizes the expected loss of the pensioner as measured by the performance of the pension fund against a benchmark. Two benchmarks are considered: a risk-free investment and the price of an annuity. The fair-value income drawdown rate is defined so that the fund performance is a martingale under the objective measure. Annuitization is recommended if the expected fair-value drawdown rate falls below the annuity rate available at retirement. As an illustration, the annuitization age is calculated for a Gompertz mortality distribution function and a power law loss function. |
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