30% drop in annuity rates since the start of Quantitative Easing
Annuity rates down by 30pc since start of QE
The incomes that pensioners get from an annuity have fallen by almost 30pc since the Bank of England began its “quantitative easing” or money-printing programme.
The Bank of England – Annuity rates down by 30pc since start of QE
Richard Evans By Richard Evans2:59PM BST 10 Jun 2013Comments3 Comments
In the second quarter of 2009 a £100,000 pension pot bought an annual income of £5,040, assuming 3pc annual increases and a five-year guarantee. The figure has now fallen to £3,580, a decrease of £1,460 or 29pc, according to Axa. Over a 25-year retirement, this would mean £36,500 less in total income.
Since it announced the policy of quantitative easing or QE in March 2009 the Bank has pumped £375bn into the economy.
QE involves the Bank using newly created money to buy government bonds, also known as gilts. When such a large new buyer enters any market, the price of the asset it is buying tends to rise. Bonds pay a fixed rate of interest, so a rising price means a falling yield – and annuity rates are largely based on 15-year gilt yields.
Simon Smallcombe of Axa said: “QE has been blamed as one of the main factors in pushing down annuity rates. When you look at the timing of the Bank of England’s programme and look at the annuity rates over that time, there is a clear trend of decreasing rates.”
Annuity rates are currently close to record lows but there are hope of an improvement, perhaps of 10pc within the next two years. Gilt yields have started to rise as investors recover their appetite for the stock market and as receding fears of a bank collapse encourage savers to hold cash.
But many commentators have attacked QE because of its perceived effects on savers and pensioners. Apart from its likely effect on annuity rates, QE has been blamed for stoking inflation, driving “real” interest rates on most savings accounts into negative territory.
Last week a leading fund manager, Jason Pidcock of Newton, likened QE to socialism and said it should be illegal.
Mr Smallcombe added: “Many people approaching retirement will face some very difficult decisions and may have to choose between delaying retirement to bridge the income shortfall or retiring and converting their pension pot before annuity rates fall further. Many annuities are problematic because once you convert your pension pot, you are effectively lifting a drawbridge and there is no going back.”