The Bank of England has announced it's injecting a further £50 billion into the economy. Read what this means for pensions here.

By Lana Clements

Last week the Bank of England announced it was increasing the size of its Quantitative Easing (QE) programme. In effect, this injects an extra £50 billion into Britain's economy.

Pensioner campaign groups have denounced the decision and said it will result in a permanently poorer retirement for many people. "Anyone recently or soon-to-be retired may be facing a stark reality – the Bank of England policy is robbing them of the retirement they saved for," says Dr Ros Alman, director-general of over 50s group Saga. "Millions of people who saved diligently for their retirement are now bitterly disappointed with their situation."  

But why is this and is there anything that can be done?

Quantitative Easing

QE is thought of by many people as simply printing more money, but this isn't how it works. The Bank of England put more money in the economy though its asset purchase programme, which it has now raised from £275 to £325 billion.

As the name suggests, this means the Bank buys a number of investment products, but rather than using money it already has, it simply credits accounts. The Bank hopes that by putting more money with the banks they will lend more and increase the money circulating in society, helping to stimulate growth. 

A large share of its purchases is government bonds – known as gilts. But the Bank's buying of gilts has a direct effect on pensions. When more gilts are bought it pushes up the price, as there is more demand. As the price rises, the interest paid out on these bonds lowers and this determines annuity rates.

A person retiring will usually buy an annuity with the money they have saved over the years in their pension. An annuity pays out an annual income for the rest of the person's life. There is no option to change an annuity once it has been bought, so lowered annuity rates means that this person will have a lower income for the rest of their life.

Annuity rates are already at near record low levels. The Bank first began its QE programme in 2009 and that year annuity rates were reduced by 6%. According to Dr Altman, a £100,000 pension fund in 2009 would buy an annuity that would pay out £7,000 a year. Now, £100,000 would buy an annuity paying around £5,800 a year - a significant drop.

Campaigners are claiming that the Bank's policy makers have failed to take into account pensioners. Dr Altman says QE was supposed to be a temporary boost for the economy but is now making "pensioners permanently poorer".

Inflation

While QE directly lowers pension income through annuity rates, in a double blow it also erodes spending power of the money. One of the biggest worries about extra money in the economy is that it creates inflation. High inflation is bad news for most people, as it means the cost of living for everyone goes up, but it can hit pensioners particularly hard.

Saga last month said inflation for pensioners was at 5.5%, much higher than the national Retail Price Index (RPI) measure of inflation which stands at 4.8%. This is because pensioners spend proportionately more money on gas and electricity bills, the costs of which are currently rising well above overall inflation.

Some inflation is needed otherwise it's difficult for the economy to grow. But it's a fine line to tread. The Bank's Monetary Policy Committee (MPC) decided extra QE was needed, as other pressures would mean inflation would otherwise fall too low. The MPC said inflation should still fall in the short-term, which may offer some relief to pensioners.

What can be done?

Make sure that you shop around for your annuity. Many people buy the annuity on offer with their pension provider. But the best paying annuity can often be got elsewhere, so it is essential to compare.

Some people may want to hold off buying an annuity at the moment to see if rates improve. However, those thinking of this option need to check the terms of their pension. Some providers will penalise those that don't take their pension at the originally chosen date. And of course, there's the risk that rates could actually get worse.

Income drawdown is another option. This allows those at retirement to take a quarter of the pension fund as a tax-free sum (note, you can also do this before buying an annuity), and the remainder of the pension pot goes into an income drawdown policy, which pays an income each year. The problem is that drawdown income is also affected by the interest rates on gilts. The lower the rates, the less money that can be taken out as income.

Meanwhile, it's also important to consider where your money is held in other investments and savings accounts and re-jigging your finances if necessary. Simon Healy, head of savings at Aldermore says: "Pensioners and those approaching retirement age should look carefully at their sources of income – including investments, cash ISAs and savings accounts – to make sure they're getting the best deal available."