The Bank of England’s Monetary Policy Committee (MPC) has given the UK economy another dose of Quantitative Easing (QE) medicine, increasing the existing program by a further £50 billion, taking the total to £375 billion.
The theory behind QE is that helps the stagnant economy, but there are some pretty nasty side effects to this particular medicine especially when it is taken at the same time as low interest rates.
So, whether you are a borrower, a saver, soon to retire or already a pensioner, how does QE affect you?
People retiring soon
This group are probably the hardest hit by QE due to the effect it has on gilt yields.
Simply put QE pushes up the price of gilts, because we have a very willing buy with deep pockets in the form of the Bank of England, this pushes down gilt yields, which reduces Annuity rates.
Our own research shows that Annuity rates have fallen by around 4.5% over the past two months and by 12% over the past year; reducing a typical Annuity for a male aged 65 with a £100,000 fund by over £750 per year.
In June alone there were 16 rate reductions by Annuity providers, you can see how far Annuity rates have fallen by using our pension calculator.
With more QE possible and further falls in Annuity rates expected because of the EU gender directive and Solvency II, we believe there is no reason to expect Annuity rates to start to rise anytime soon; in fact we believe they will fall further still.
If you have already bought an Annuity the recent falls in Annuity rates will not affect you, however if you opted for Income Drawdown you may well have a shock when you come to your next compulsory review.
The maximum amount you can take each year from an Income Drawdown plan is linked to gilt yields, which we know have fallen. When you come to your next review, which have to take place every three years if you are under the age of 75, it is probable that the maximum income you can take will fall.
We’ve seen cuts in pensioner’s incomes of between 30 – 40%, a massive amount when inflation continues to increase the cost of living.
QE is in theory good news for borrowers as it is designed to help cut borrowing costs and make finance more available.
The Bank of England is using QE and also interest rates to try and steer the economy through these troubled times. Frequent injections of QE, along with all time low interest rates are likely to help borrowers, that is of course providing they can get access to the finance in the first place; having low interest rates is no help whatsoever if no one will lend you any money!
Where borrowers should benefit from QE and low interest rates the reverse is true for savers.
With long term fixed rate bonds closely linked to gilt yields even the Bank of England acknowledge that savers had borne a “considerable burden” as a result of low interest rates.
Over the past four years or so, even for the best buy savings accounts, savers have seen the interest rates they receive fall massively, and for a period of time inflation was a serious threat. Whilst it is now easier for savers to get a real return, after inflationary pressures have started to ease over the past couple of months, continued low interest rates are still a real pain for savers.
The fear though is that recent falls in the rate of inflation are just a blip and that QE will actually push the rate of inflation higher in the future, making it even harder for savers to get a real return on their savings accounts.
If you are concerned about the impact that low interest rates and Quantitative Easing is having on your finances our team of Independent Financial Advisers in Nottingham are experienced in making your savings, investments and pensions work harder for you. Clicker here to meet the team.