People about to start taking money from their pensions are being warned that their retirement income could be significantly lower as a direct result of the government’s policy of quantitative easing.
Annuity providers have already reduced their rates, after the government said last week that it would buy up gilts in an effort to lower yields.
The government hopes that by buying gilts, it will encourage people who sell their gilts to plough money into other areas of the economy and help companies desperate for funding. When a lot of gilts are being bought, this causes the price to go up and the yields to go down.
But gilt yields have a direct impact on the annuity rates offered by pension providers, who use them to calculate how much they can afford to pay out to people buying a retirement income.
Yields on longer-term 10- year gilts fell by around 0.6 percentage points on Wednesday, after the Bank of England began its programme of buying up to £75bn-worth of government debt.
Major annuity providers including L&G, Norwich Union and LV have already lowered their rates by up to 2 per cent, and Hargreaves Lansdown says other providers will be forced to follow in the next few weeks.
“The speed of response from annuity providers was significant,” says Tom McPhail at Hargreaves Lansdown.
McPhail says anyone thinking of buying an annuity in the next few months should probably do so as soon as possible. “If you’re going to buy an annuity today or in six months, do it today,” he warns.
Ros Altmann, an independent policy adviser and pensions expert, has spoken out against quantitative easing, arguing that artificially depressing yields will damage people’s pensions.
She calculates that a combination of lower annuity rates and stock market falls means that people buying an annuity now could have an income of 35 per cent less for the rest of their lives.
Malcolm Cuthbert at Killik & Co cautions that final salary schemes, already in deficit, will now be struggling even more.
He even suggests people consider taking early retirement and a reduction on their pension income, rather than take the risk of their employer going bust. The Pension Protection Fund only pays a maximum yearly income of £27,771 in such cases, and there are already concerns over whether it will be able to afford this, if more companies file for bankruptcy.
But over the longer term, the impact of quantitative easing on pensions is less clear. Cuthbert says it could have the effect of lowering gilt prices, and correspondingly causing yields – and annuity rates – to go back up, if the market is flooded.
McPhail warns that inflation could return over the medium term, making it prudent to buy an inflation-linked annuity now, even though these initially pay out an income of about a third of a normal annuity.
“If you are buying an annuity today, I would urge you to consider buying inflation proofing – at least on some of your fund,” he says.
Those with pension pots of £200,000 or more, and willing to take some risk, could stay in income drawdown. This might enable their pension funds to recover from stock market falls, and delay buying an annuity for a few years until rates go up again – although neither outcome is certain and McPhail warns it is a “gamble”.
