23 August 2012 last updated

Pension annuity buyers biggest losers from QE while richest 5% gain

Pensioners retiring are the biggest losers from the Bank of England's measures as annuity rates have reduced by 21% since March 2009. The Bank of England has produced a report of how lower interest rates and quantitative Easing (QE) have impacted on household income since introduced in March 2009. Interest rates have been reduced due to the financial crisis started with the collapse of Northern Rock in 2007 to historic lows of 0.5% today. Both interest rates and QE have resulted with investors selling gilts to purchase corporate bonds, equities and other assets to receive a better return so the price of gilts has increased thereby reducing the yield which annuity rates are primarily based. The Bank of England has argued that while savers have lost out the effect on pensioners has been neutral as they have benefited from increasing equity markets thereby off-setting the fall in gilt yields when buying annuities.

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Pension annuity income now 21% lower

Pension savings are long term investments and a significant proportion of a pensioners fund would have been accumulated before the financial crisis resulted in the decline in equity markets in May 2008. At this time the FTSE-100 index was at 6,250 and based on our benchmark pension annuity example for a male aged 65 with a £100,000 an annuity income for a single life, level basis was £7,644 pa at that time.

The FTSE-100 index reached a low of 3,700 in February 2009 and the benchmark example if the assets reflected this index would have a fund value of £59,200. With annuity rates lower at 7.30% this would produce an income of £4,374 pa or a 42.7% reduction in total income due to the fall in equities and annuities.

Today equities have recovered to 5,776 so in the benchmark example the fund would be £92,400 with pension annuity rates reducing to 5.74% producing an income of £5,303 pa or a 30.6% reduction in total income compared to May 2008.

Over this time the 15-year gilt yields have reduced from 4.17% to 2.10% due to the financial measures taken since the start of the financial crisis.

Excluding the fact equities have not fully recovered to May 2008 levels, the effect of the financial crisis and QE on pension annuity rates has resulted in annuity rates for our benchmark example of £100,000 reducing from £7,309 pa on February 2009 to £5,746 pa today a fall of £1,563 pa or 21.3%.

Only with further pension savings from the equity lows in May 2009 would our benchmark pensioner be able to recover the original position back in May 2008 requiring an additional fund of £40,800 which would include the pensioners own contribution, tax relief and equity growth in the fund.

Richest 5% have gained

The bank of England has claimed that since the start of the £375 billion Quantitative Easing programme the value of equities and bonds have risen by 25% of £600 billion although 40% of this wealth is owned by only 5% of the richest households. The Office of National Statistics (ONS) have stated that this has resulted in a boost in assets for the richest in the country of up to £322,000.

The BoE has stated that although savers and pensioners have been hit hard they have stated that without reducing interest rates and Quantitative Easing it is likely that the economy would be far worse than it is today including pensioners buying annuities.