Pensioners are likely to be amonst the first victims of quantitative easing, as experts predict that the government’s plan will knock 10% off annuity rates.
Millions of pensioners have good reason to smile (a little) because the Basic State Pension is uprated in line with the previous September’s Retail Prices Index (RPI), rather than the zeroflation we are currently witnessing. Therefore, pensions will rise by 5% from April, which, considering everything else financial, is a bit of good news.
But those hundreds of thousands of people approaching retirement will not be so lucky. They are among the first victims of the government’s ”quantitative easing” (QE) plans. Why, you might ask? Well, annuities, the guaranteed retirement income that most savers with money purchase or defined contribution pensions buy at retirement, are based on gilts, another name for bonds that are issued by the government. QE entails buying back vast large amounts of these gilts, and this has pushed up their price and forced down their yield, (the income paid by these bonds expressed as a percentage of what they cost to buy on the stock market).
What this all means is that for people unlucky enough to be forced by when they were born to have to turn a lifetime’s pension saving into a retirement income today, is that the annuity quotes they get are some 10% less than a year ago.
Let’s look at this in cash terms, this would mean a 65-year-old man retiring with a £100,000 pension fund will receive £805 less annuity income than he would have got a year ago. If this man has an average lifespan, that means he will receive £17,000 less than if he had bought his annuity a year ago.
If more pensioners understood what is going on, it wouldn’t just be younger folk rioting outside the G20 economic summit in London’s docklands this week.
However, have you noticed that the FTSE 100 index of Britain’s 100 biggest shares has risen by 13% since the start of this month, or the Dow Jones in American 22%? Probably not. It isn’t bad news so it didn’t get reported.
