Pensions have lost a third of value in three years
Pension payouts are almost a third lower than they were before the beginning of the Government's attempts to boost the economy through quantitative easing, figures published today reveal.
The accountants PricewaterhouseCoopers calculate that pension incomes overall are now 30 per cent lower than they were three years ago, before the QE programme began in March 2009.
With diving stock markets likely to hit pension pots further and this week's £75bn QE extension announcement set to shrink annuity payouts, anyone planning to retire soon who hasn't got a final-salary pension faces a bleak financial future.
Peter McDonald, a partner in the pension practice at PwC, warned: "Compared to only three years ago, a money purchase pension is now worth perhaps 30 per cent less than it was."
The QE policy – in which new money is created to buy government bonds in the hope that the injection of cash into the economy will encourage spending – has a knock-on effect on annuities.
Recent stock market fluctuations have already bolstered the gilts market, driving up the cost of purchasing an annuity, which people approaching retirement use to buy a income. Thursday's announcement that the Government will extend the QE programme to £275bn over the next four months will further depress the rates of interest paid by government bonds.
"The increased demand for bonds – principally gilts – created by the Bank of England's quantitative easing programme pushes up the price, which in turn pushes down the yield," explained Tom McPhail, head of pensions research at Hargreaves Lansdown.
The problem for pension investors is that annuity rates are closely correlated with gilt yields, Mr McPhail said. When anyone buys an annuity from an insurance company, a large part of the fund handed over will end up invested in gilts. The insurance company then uses the income it receives from the gilts to pay an annuity income, so if gilt yields fall, so do annuity rates.
Based on this week's gilt figures, PwC reckons a pension pot of £300,000 would convert into a pension income of just £18,500 a year. Only three years ago, the same sum would have generated nearly £22,500 a year.
The firm says that, taking into account the fact that equity-heavy pension pots have been hit badly by falling stock markets in the past three years, the net result has been a 30 per cent fall in pension income payouts.
"This huge reduction is due to higher annuity costs and a smaller pension pot where investments hadn't switched out of equities before retirement. It will leave many people retiring now caught between a rock and a hard place. If they defer buying an annuity until prices improve, they're stuck with no income in the meantime," said Mr McDonald. Ros Altmann, a former pensions adviser to the Treasury, has warned of the dangers of the Bank of England's QE policies for pensions since 2008.
"QE may be designed to bolster short-term growth but it has devastating long-term effects on pensioners," Ms Altmann, director general of Saga, said. "Because QE is designed to lower long-term interest rates, it is also designed to worsen annuity rates.
"Annuities are priced off gilt yields and corporate bond rates, since insurance companies have to back their annuities with gilts and AA/AAA corporates. Therefore, anyone buying their annuity will be permanently poorer in retirement as a result of QE.
"Companies will have to put more money into their pension funds, individuals will find they get far less pension for their money and, as inflation is so high, those buying fixed annuities will become poorer each year as their purchasing power is eroded by rising prices," Ms Altmann said.
However Mr McPhail said people shouldn't use today's news to delay buying an annuity. "Investors should get on with buying their annuity," he said. Those wanting to keep their options open can phase annuity purchase over a period of months or years.
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