Posted on October 14th, 2011 | Categories - News
New research has shown that the Bank of England’s decisions on interest rates and Quantitative easing (QE) since the credit crunch have made pensioners significantly worse off in real terms.
Historically low interest rates, rising inflation and Bank’s £275 million of QE is having a disastrous affect on pensioners incomes and savings.
Pensioners are being hit from three different sides.
Firstly high inflation is eating away at the purchasing power of pensions. Secondly a combination of low interest rates and high inflation reducing the true value of savings and finally low gilt yields, which are partially due to the policy of QE, are pushing Annuity rates to all time lows.
Ros Altman, (right) governor of the London School of Economics and director general of Saga estimates that people who have recently retired could have seen their incomes fall by £4,245 a year, compared to the years before the credit crunch struck in 2007.
The figures are based on a pensioner having savings of £50,000 and a £100,000 pension to buy an Annuity.
If interest on savings was paid at a rate equivalent to Bank of England Base Rate then the return will have fallen by 91% since 2007 and Ms Altman believes Annuity rates have fallen by approximately 21% over the same period.
Ms Altman said: “Pensioners on fixed annuities are having a torrid time. Anyone coming up to retirement now will be hit by the drop in Annuity rates – QE directly depresses Annuity values, so everyone buying an Annuity will have less income for the rest of their life due to this current policy.”
She continued “Even though the Bank of England may consider QE a temporary necessity, its effect will be permanent for anyone retiring and taking their Annuity now.”
Billy Mackay of SIPP provider, AJ Bell, agrees: “The need to stimulate the economy is only too clear but an unfortunate side-effect of Quantitative Easing is that it will result in another cut in pensioners’ income at a time when they can ill afford it.”
He continued: “This comes as a real blow because gilt yields were already at record lows before this £75bn stimulus package was announced. It’s entirely feasible that this will lead to further falls and heartache for people considering buying an Annuity.”
Pensioners are affected more by inflation than younger generations. According to the Centre for Economics and Business Research inflation has totalled 13.9% for the population as a whole, however according to Saga’s figures pensioners have suffered inflation of 19%.
It is now almost impossible for tax payers to get interest on their savings sufficient to keep pace with inflation and the recent withdrawal of National Savings Index Linked Certificates was a further blow to savers.
Experts warn that the current period of low interest rates, low Annuity rates and high inflation mean that shopping around for the best deals has never been more important.
However, whilst interest rates are likely to rise in years to come experts also warn that once a pension saver has bought their Annuity they are locked into it for life, even if Annuity rates rise in the future.