Annuity rates: Mr Bean downplays the effect of QE on retirees

Posted on February 28th, 2012 | Categories - News

The popular financial press have been awash with stories highlighting the effect the Bank of England’s Quantitative Easing (QE) program has had on Annuity rates.

Saga and their Director General, Ros Altman, have been particularly vocal, saying only last week: “QE has permanently impoverished more than one million pensioners, and thousands more Annuity purchasers will receive reduced pensions every week.”
However, at least one influential figure disagrees.

In comments also made last week, Deputy Governor of the Bank of England, Charlie Bean (pictured) said that recent and would be retirees had not been as hard hit by QE as many claim and that pensioners cannot be immune to the economic downturn.

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Falling Annuity rates

Any pension Annuity calculator will show just how far Annuity rates have dropped over recent months, in many cases by around 12% and by over 20% since QE was first introduced in 2008. The drop in Annuity rates, shown by the pension Annuity calculator, is primarily as a result of falling gilt yields, which are lower in part due to the Bank’s program of QE.

Mr Bean acknowledged that retirement incomes have dropped due to lower Annuity rates, but argued that the Bank’s program of QE had helped to increase the value of assets typically held by pension funds, giving a large fund with which to buy an Annuity.

Speaking to the Scottish Council for Development and Industry “Someone with a £100,000 pension pot, who could have expected that to yield an annual pension of a little under £7,000 three years ago, would now get just under £6,000. That is a rather substantial income loss. But it is only part of the story.”

He continued: “Those pension funds will typically have been invested in a mix of bonds and equities. The rise in asset prices as a result of QE also raises the value of the pension pot, providing an offset to the fall in Annuity rates.”

No immunity from the economic crisis

Mr Bean went on to add that pensioners could not expect to be immune from the troubles facing the economy, saying: “Savers have every right to feel aggrieved at losing out; after all, they did nothing to cause the financial crisis. But neither did most of those in work, who have seen a substantial squeeze in their real incomes. And unemployment, particularly among the young, has risen. There have been few winners over the past few years.”

Angry reaction

The comments from such a senior figure are likely to provoke an angry reaction from pensioners and would be retirees who have been hit by a combination of falling Annuity rates, high inflation and low interest rates.

Inflation has been a particular problem with most Annuities being arranged on a level basis, with no annual increases in income to help offset the effects of inflation. Furthermore over recent months inflation has generally been above even the best savings interest rates, eroding the value of savings.