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

Monika Bütler and Alma Ramsden

Journal of Pension Economics and Finance, 2024, vol. 23, issue 1, 1-29

Abstract: We analyze how taxes affect the choice between a life-long annuity and a one-off lump sum payment, the so-called annuitization decision. Using administrative data from a large Swiss pension fund, we impute taxes for the lump sum and the life-long annuity option. We show that taxes can explain a significant part of the variation in annuity rates. Exploiting kinks in the tax schedule of the one-off lump sum, we further find evidence for tax optimization strategies. Our findings suggest that individuals react strongly to tax incentives when making retirement choices.

Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:cup:jpenef:v:23:y:2024:i:1:p:1-29_1

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