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The Bank of England's quantitative easing policy has eroded pensioners' incomes and left new retirees thousands of pounds worse off, experts warned today.
With the Bank's policymakers expected to sanction more money-printing tomorrow, Tom McPhail, head of pensions research at Hargreaves Lansdown stockbrokers, said the UK's pension annuity rates have been in ‘meltdown’ for the past four years.
He said that a man with £100,000 in July 2008 would have been able to secure an income of £7,855 whereas his younger brother, who hits pension age today, would only be able to secure an income of £5,743 â€" a drop of 27 per cent.
Printing money: QE is being blamed for dramatic fall in annuity rates
Money-printing has dramatically reduced the yield on government bonds â€" known as gilts â€" to which annuity rates are linked, forcing those who are newly retired to buy an annuity which will pay out significantly less than it would have done previously.
The Bank’s monetary policy committee is widely expected tomorrow to boost its QE programme by a further £50billion, with some economists expecting a further £75billion.
Annuities, which provide pensioners with a fixed income for life, have dropped considerably since QE began, and Ros Altmann from Saga has said that falling payout rates ‘have permanently impoverished over a million pensioners.’
Mr McPhail commented: ‘All other things being equal, we would expect a further fall in gilt yields following an announcement of additional QE and in a short space of time this would be expected to feed through into lower annuity rates. Again.’
He added: ‘For investors who are willing to wait for an uncertain period, possibly years, there is the option to delay annuity purchase and wait for yields to recover.’
Mr McPhail also said that any fall in gilt yields is also likely to fuel a record deficit in private sector final salary schemes reported by the Pension Protection Fund (PPF) last mo nth.
The deficit of 6,432 schemes is estimated to have increased to £312.1 billion at the end of May, which pensions groups said showed the ‘immense pressure’ final salary funds are under.
The deficit is the largest since the records began in March 2003, although the PPF has cautioned that direct comparisons are affected by changes made to its calculations from April last year, which had the effect of raising liabilities.
QE makes it cheaper for companies to borrow by pushing down the yield on government bonds, but lower gilt yields and long-term interest rates mean that pension funds are more expensive to finance, and so appear deeper in the red.
Joanne Segars, chief executive of the National Association of Pension Funds (NAPF), said last month: ‘Quantitative easing and international investors seeking a safe harbour from the euro storm have contributed to a sharp drop in gilt yields.’
The NAPF has warned that firms are legally obliged to fill the deficits, which will divert money from jobs and investment and lead to more private final salary schemes being closed.
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