Closed-form solutions for an explicit modern ideal tontine with bequest motive

DOI10.1016/J.INSMATHECO.2021.05.008MaRDI QIDQ2234764zbMATH OpenOpenAlexFDO

Authors John Dagpunar

Publication date 19 October 2021

Published in Insurance Mathematics \& Economics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2005.00715

zbMATH Keywords

constant relative risk aversiontontinesbequest motivedefined contribution pensiondynamic consumption economics

Mathematics Subject Classification ID

Actuarial mathematics (91G05)

Abstract: In this paper I extend the work of Bernhardt and Donnelly (2019) dealing with modern explicit tontines, as a way of providing income under a specified bequest motive, from a defined contribution pension pot. A key feature of the present paper is that it relaxes the assumption of fixed proportions invested in tontine and bequest accounts. In making the bequest proportion an additional control function I obtain, hitherto unavailable, closed-form solutions for the fractional consumption rate, wealth, bequest amount, and bequest proportion under a constant relative risk averse utility. I show that the optimal bequest proportion is the product of the optimum fractional consumption rate and an exponentiated bequest parameter. I show that under certain circumstances, such as a very high bequest motive, a life-cycle utility maximisation strategy will necessitate negative mortality credits analogous to a member paying life insurance premiums. Typical scenarios are explored using UK Office of National Statistics life tables.

Recommendations

• Optimal retirement income tontines
• Modern tontine with bequest: innovation in pooled annuity products
• On the optimal combination of annuities and tontines
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Cites work

• Actuarial fairness and solidarity in pooled annuity funds
• Bringing cost transparency to the life annuity market
• Equitable retirement income tontines: mixing cohorts without discriminating
• Exchanging uncertain mortality for a cost
• Modern tontine with bequest: innovation in pooled annuity products
• Optimal consumption and portfolio choice for pooled annuity funds
• Optimal investment choices post-retirement in a defined contribution pension scheme
• Optimal retirement income tontines
• Optimum consumption and portfolio rules in a continuous-time model

Cited in

(1)

• Optimal performance of a tontine overlay subject to withdrawal constraints

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