Taxation and the saver's choice between a life annuity and a lump sum pension plan payout: The case of Spain

Abstract

On the basis of the Bank of Spain's Survey of Household Finances for 2005, this article uses probit techniques to estimate how far the personal income tax marginal rate influences the decision of pension plan beneficiaries to opt for payout in the form of a lump sum or a life annuity. In the first place, the article concludes that it is probable savers will not become aware of the effects of taxation on the form of payouts until the contingency covered by the pension plan (retirement) arises. Second, our results suggest that savers decisions may be short-sighted, as they are often more concerned to defer the payment of income tax than they are to choose the alternative that will optimise their tax liabilities. © 2012 Macmillan Publishers Ltd.