As the Bank of England injects £75billion into the economy, this could have an adverse effect on annuities of those retiring.

Annuities – regular income from a retiree’s pension pot – are paid by insurance companies, the amount of which is based on the yields made from government bonds or gilts, which have dropped dramatically after it announced on Thursday it planned to create £75billion to buy these gilts.

The annuity of a £100,000 pension pot now stands at up to £6,488 per year, nearly £400 lower than the average of a joint life annuity last year. However, this is still higher than when it dipped below £6,000 in 2006.

Annuity rates reached a 6-year high in the summer of last year, but have dropped 8% since.

Retiree’s at the peak last summer would be able to convert their pension savings into a much higher income for the rest of their life than someone planning on retiring now.

17-Year High for Bonds

The announcement about the plan to use quantitative easing has meant that price of government and corporate bonds has hit a 17-year high.

However, the interest from these bonds has also significantly fallen, which has reduced the amount made by pension funds, therefore cutting the amount that will be paid out to retiring investors in annuities.

Representative of Hargreaves Lansdown said: “annuity rates have been falling quite substantially in the last four of five months.

“However, the £75billion, which is a huge sum of money, is only going to add to the retiring investors’ woes.”

He also recommended that those planning on retiring in the near future shop around to find their annuity, or possibly even split their pension pot and spend some now and some in annuities later.
He also advised that he expects the annuity rate to fall further still before it gets better.

Chancellor Alistair Darling has given the Bank permission to extend the £75billion cash injection up to £150billion if needed in the future, with the idea that commercial banks will find it easier to lend money to consumers if the amount of money in the system in the first place is boosted.

Great for the Young, A Potential Disaster for the Old

Deputy governor of the Bank’s Monetary Policy Committee, Charlie Bean has said the effect of the policy will be closely monitored, admitting to a “a good deal of uncertainty” over the impact it will have, including  a chance of inflation in the future.

However, the Institute of Fiscal Studies has reported that inflation for pensioners is already rising.

The director general of Age Concern has warned: “as younger people enjoy the benefits of the lowest levels of inflation for decades, older people still find much of their income is swallowed up by high food and fuel bills, forcing many to make drastic cutbacks.”

He added that it was important for pensioner to claim back all benefits they are entitled to, to see them through this period.

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