Annuity Puzzle: Evidence from a Swiss pension fund

We analyze individual annuitization decisions at retirement in an environment with mandatory participation into a funded pension pillar and low average annuity price. Using administrative data from a large Swiss insurance company over the period 2011-2015, we document that, even in this favorable environment, only 42.6% of the retirees fully annuitize, against 45% taking full lump sum. We individual annuitization decisions strongly respond to financial incentives, measured by the Money Worth ratio, and the tax rates on annuity and lump sum payments. Lump-sum payments are more common among French and Italian speaking individuals. Using Share data, we show that French and Italian-speaking Swiss are more likely to leave inheritance – thus suggesting that preferences for bequest may effect annuitization decisions. Finally, we provide evidence of "passive" adverse selection, since individuals living in high mortality municipalities are less likely to annuitize and more likely to cash out their pension wealth.