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."