New research has confirmed the devastating impact Quantitative Easing has had on Annuity rates.
The figures, from AXA Life Europe, show since Quantitative Easing was introduced by the Bank of England in March 2009, Annuity rates have dropped by 29%.
Annuity rates have been falling for some years due to increased life expectancy. However, the research from AXA provides confirmation, if any were really needed, that Quantitative Easing has pushed Annuity rates significantly lower.
The Bank of England has previously said would-be retirees have benefited from higher pension funds, through the improved investment performance resulting from Quantitative Easing. However, many experts remain unconvinced and believe any increase in asset prices has not been enough to compensate for lower Annuity rates.
Simon Smallcombe, of AXA, said: “QE has been blamed as one of the main factors in pushing down Annuity rates and when you look at the timing of the Bank of England’s programme and look at the Annuity rates over that time, there is a clear trend of decreasing rates.”
What is Quantitative Easing?
Quantitative Easing, or QE for short, involves the Bank of England creating additional money and injecting it into the economy through buying gilts, in the hope that it will stimulate the economic recovery.
Since 2009 £375 billion has been created and dripped into the economy. However, the existing programme of QE has not been extended for some months, although it is thought with Mark Carney, the new Governor of the Bank, taking over from the departing Mervyn King shortly, the current level of QE could be expanded sooner rather than later.
Why does Quantitative Easing affect Annuity rates?
The process of Quantitative Easing involves the Bank buying gilts, which are effectively loans to the UK government.
Investments in gilts are seen as a secure home for capital and are therefore used by insurers to underpin the guarantees provided on Annuities.
However, Quantitative Easing turns the Bank of England into a buyer of gilts, which forces up the price and pushes down the yield, which is fixed. This means insurers have to buy more gilts to provide the same Annuity income, thereby pushing down Annuity rates.
Any increase to the existing Quantitative Easing programme is likely to be detrimental to Annuity rates and possibly cancel out some of the recent increases we have seen due to a slight rise in gilt yields.
Simon Smallcombe again: “Many people approaching retirement will face some very difficult decisions and may have to choose between delaying retirement to bridge the income shortfall or retiring and converting their pension pot before annuity rates fall further.”
“The most useful step people between five and 10 years from retirement can take is to seek advice as early as possible.”
“This allows the adviser to research all option available, such as unit-linked guarantees for people who want to protect their pension pot from falling Annuity rates and negative market movements but stay invested to capture any growth at the same time.”