The Science of Flexible Retirement Choices: Switching Retirement Savings into an Annuity

In this article we consider the choice that retirees might make between drawing down from their pension pot or the purchase of an annuity. A key finding is that in a world of loss aversion, across a very wide range of assumptions, there is almost always a crossover point during retirement at which moving out of drawdown and into an annuity can be the optimal strategy. This suggests that the pension industry should investigate the construction of a hybrid, "flex-first, fix-later" pension product. We show that a hybrid approach can produce much higher levels of happiness, especially at older ages, than staying wholly in drawdown or buying an annuity at the point of retirement.