2nd October 2013
The UK Government’s so-called quantitative easing strategy may have helped to get the economy back on track but it has also inadvertently managed to wipe thousands of pounds off the value of British pensions writes Philip Scott.
QE was introduced in a bid to stimulate economy expansion through the purchase of assets, including UK Government debt or ‘gilts’.
Between March 2009 and July 2012, the Bank announced a series of purchases totaling some £375bn.
How this ties into pensions is that that rate you receive from an annuity – the income you receive for the rest of your life in exchange for your nest-egg – is determined by a number of factors, including the returns available on 15-year UK gilts, which are key to the QE story.
READ MORE: What you need to know to retire in comfort
But since the introduction of QE in March 2009, the benchmark 15-year UK gilt return has reduced by 20% and in the same period, annuity rates have collapsed by around 15% according to retirement specialist MGM Advantage.
To show the impact of falling annuity rates, a £100,000 pension in March 2009 would have paid an annual income of around £6,930 a year from a conventional annuity, for a male aged 65. But present that same pension would only generate around £5,877 a year, or 15% less.
To make matters worse, over a typical retirement of 21 years, the annuity rate today would generate £22,113 less total income than the annuity purchased in March 2009.
Andrew Tully, pensions technical director, MGM Advantage says: “There is no doubt the annuity legacy from QE will be felt for many generations to come. People over the last few years have purchased annuities at all time low rates, with prices driven down by the returns available on gilts.
“We have seen annuity rates perk up over the course of this year, but they are still a long way off the rates from before the QE programme came in. With inflation remaining above target, people approaching retirement are facing some tricky decisions.
“Although it might make sense to take the highest initial income you can get from an annuity, you really do need to consider all of your options. This is where seeking professional advice can play a crucial role in helping you make the most of your savings.”
What can you do now?
As the Bank of England Governor Mark Carney has effectively called time on further rounds of quantitative easing, MGM Advantage offers some tips to consider before taking retirement income:
1. Do your homework – time spent researching your options could be time well spent
2. Don’t accept the initial offer from your pension provider, exercise your right to shop around for the right type of solution.
3. Shopping around for the best rate annuity for your individual circumstances, the difference can be as much as 34% or more.
4. Look at all of your options, for example the range of investment-linked annuities now available – as little as a 3% investment return is required to match the income on the best conventional annuity rate
5. Think about your partner and family, considering whether to provide for them when you die through a guaranteed period or joint-life annuity
6. Consider how long you will enjoy retirement, and think about how your spending pattern will change over that time along with how inflation might affect your income
7. Consider whether you might get a better rate through an enhanced annuity if you have medical or lifestyle conditions, up to 70% of people who retire could qualify
8. Consider if you need to take income now, or if you could take income in phases rather than all at once. This leaves some money invested for longer to grow and gives some flexibility around what choices you make in the future
9. Seek professional financial advice to ensure you choose the best option or options for your needs