Annuity choices and income drawdown: evidence from the decumulation phase of defined contribution pensions in England
Open accessAbstract
We provide new empirical evidence on the importance of defined contribution pension wealth in England, and the nature of annuitization decisions taken by older adults who retire with such sources of wealth. Other things equal, financial literacy, and numeracy in particular, are important factors governing individuals’ choices over whether to shop around for an annuity as opposed to taking the ‘path of least resistance’ option and purchasing from their original pension fund provider. This has important policy and welfare implications given that buying an annuity on the open market has significant financial benefits for most people. In the context of the increasing reliance on private provision for retirement, the importance of individuals having the financial literacy to successfully navigate complex financial decisions late in life should not be underestimated.
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In the U.K., financial literacy and numeracy are significantly positively related to individuals' propensity to shop around for an annuity when receiving funds from their defined contribution pensions.
“Banks et al. (2015) find for the U.K. that financial literacy and numeracy are significantly positively related to individuals' propensity to shop around for an annuity when receiving funds from their defined contribution pensions.”
From Financial literacy, financial advice, and financial behavior (2017) · cites this paper as Banks et al. (2015)
The Results report statistically significant positive associations between buying an annuity from an external provider and both numeracy and experience with complex financial products, which the paper uses as an indicator of financial literacy. The Conclusions describe this as shopping around for an annuity, but specify that the study concerns retirees in England; the claim broadens the finding to the U.K. (LLM, conf=0.82)
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Cites
The Economic Importance of Financial Literacy: Theory and Evidence
Lusardi, A., & Mitchell, O. S. (2014) · Journal of Economic Literature · doi:10.1257/jel.52.1.5 · Cited by 4,698 · see citing works
Understanding Pensions: Cognitive Function, Numerical Ability and Retirement Saving*
Banks, J., & Oldfield, Z. (2007) · Fiscal Studies · doi:10.1111/j.1475-5890.2007.00052.x · Cited by 345 · cited 1× · see citing works
“The groups we use are similar to those used by Banks and Oldfield (2007). The highest ability group contains those who were able to answer correctly all questions 2–5 (regardless of whether they answered question 6 correctly).”
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Research works printed but not linked: 15
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Financial literacy, financial advice, and financial behavior
Stolper, O. A., & Walter, A. (2017) · Journal of Business Economics · doi:10.1007/s11573-017-0853-9 · Cited by 471 · see citing works
“Banks et al. (2015) find for the U.K. that financial literacy and numeracy are significantly positively related to individuals’ propensity to shop around for an annuity when receiving funds from their defined contribution pensions.”
BackgroundInfluential
- Authors
- BANKS, J., CRAWFORD, R., & TETLOW, G.
- Affiliations
- Institute for Fiscal Studies (GB)
- Venue
- Journal of Pension Economics and Finance
- Publisher
- Cambridge University Press (CUP)
- Published
- 2015-10
- Volume
- 14
- Issue
- 4
- Pages
- 412-438
- ISSN
- 1474-7472 (ISSN-L)
- 1475-3022
- PMC
- PMC4610071
- OpenAlex
- W2128722954
- Cited by
- 36
- References
- 2
- Citations by year
- 2026: 1 · 2025: 3 · 2024: 3 · 2023: 6 · 2022: 5 · 2021: 2 · 2020: 4 · 2019: 2 · 2018: 3 · 2017: 4 · 2016: 3
- FWCI
- 14.68
- Type
- journal article
- Language
- en
- Open access
- hybrid
- doi.org
- Licence
- Locations
- Journal of Pensions Economics and Finance (publishedVersion, cc-by-nc-sa)
- PubMed Central (publishedVersion, cc-by-nc-sa)
- PubMed (publishedVersion)
- Research Explorer (The University of Manchester) (publishedVersion, other-oa)
- RePEc: Research Papers in Economics (submittedVersion)
- UCL Discovery (University College London) (submittedVersion)
- Funders
- Government of the United Kingdom
- University College London
- Economic and Social Research Council (ES/H021221/1, RES-544-28-5001)
- National Institute on Aging (R01AG017644)
- Topics
- Social Sciences › Business, Management and Accounting › Accounting › Financial Literacy, Pension, Retirement Analysis
- Social Sciences › Demography › Retirement, Disability, and Employment
- Social Sciences › Decision Sciences › General Decision Sciences › Decision-Making and Behavioral Economics
- Keywords
- defined contribution pensions, pension wealth, annuitization, financial literacy, numeracy, older adults, retirement income
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