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A Life Cycle Model with Pension Benefits and Taxes

abstract A life cycle model with pension benefits and taxes is analyzed by means of stochastic control. In the phase of employment an individual earns a stochastic income, contributes to a pension plan and chooses an optimal consumption and investment strategy under a tax system. At the end of the phase of employment the individual decides to fully or partially withdraw capital from the pension plan or to retire with no reduced pension benefits. During retirement an optimal consumption and investment strategy is chosen. It is shown that the individual profits from the financial protection against the uncertainty of her life span. Further, the decision on partial or full capital withdrawal from the pension fund depends crucially on the specification of the tax scheme. Under a uniform linear tax scheme and a fair pension benefit there will be no capital withdrawal. Under a more sophisticated tax scheme no, partial or full withdrawal may occur.
   
type working paper (English)
   
keywords Pension Finance, Life Cycle Models, Continuous Time Portfolio Theory, Defined Contribution Pension Plans
   
date of appearance 2010
issuer institution University of St. Gallen
series title Working Papers Series in Finance
publisher Center for Finance Universität St. Gallen (St. Gallen)
review internal review
   
citation Moos, D., & Müller, H., University of St. Gallen (Eds.), (2010). A Life Cycle Model with Pension Benefits and Taxes. Working Papers Series in Finance. St. Gallen: Center for Finance Universität St. Gallen.