Annuity rates drop 29% since Bank of England began QE
A saver who used their pension to buy an annuity in the second quarter of 2009 would have been offered an annual income of £5,040 from a pension pot of £100,000.
After £375bn of quantitative easing, the same pension pot would have offered £3,580 in the second quarter of this year – equivalent to £1,460 per year less.
Over 25 years, the difference between an income of £3,580 and £5,040 adds up to a significant £36,500.
People, who converted their pension into an annuity in the second quarter of 2007 when annuity rates were at their most recent peak, would have an annual income of £5,110.
Quantitative easing has pushed down the value of gilt yields from which annuities are paid and annual incomes have fallen as a result.
Simon Smallcombe, head of guaranteed distribution at 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.
“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.”
He added: “The other major factor complicating the decision as to when to retire is the volatility of the stockmarket with prices falling, particularly around the time of the eurozone crisis, and bouncing back to near record levels today.”
Smallcombe said the most useful step people between five and ten years from retirement can take is to seek advice as early as possible.
“This allows the adviser to research all options 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,” he said.
“The ability to secure a guaranteed future retirement income and stay invested in the markets with the potential for growth can be a real alternative and does not rule out any option at the chosen retirement date in the future.”