Why QE is bad for pensions

Dr Ros Altmann - not someone known for pulling her punches when it comes to Government policy on pensions - has written an Article for IFA Life on the impact of the Government’s Quantitative Easing policy.

She argues forcibly that buying Gilts instead of corporate bonds makes no sense at all.

One of her reasons is the impact on pensions. Just a few quotes make the point:

“...many taxpayers are also being damaged by this incoherent policy.  As long interest rates are artificially forced lower - and short rates have already virtually hit zero, pension funding gets worse and worse.  This hits ... individuals who find the cost of buying their annuity has soared.”

And:

“Workers coming up for retirement this year are in a dreadful dilemma.  Someone with, say, £30,000 in their pension fund last year could have retired with a pension of £2,100 a year for life (using a 7% annuity rate).  Someone with £30,000 in their pension fund this year, would only get £1,800 a year (using a 6% annuity rate); this is about 20% less pension for the same money.

“However, someone with £30,000 in their pension fund last year is likely to have far less than that this year, as the markets have plunged.  Most funds have lost over a quarter of their value, so the £30,000 fund value last year would  be worth only around £22,500 this year.  That would only buy an annuity worth £1,350 a year now _ a loss of £750 a year or nearly 35% loss of pension!  This year nearly half a million people will buy an annuity and all of them will suffer lower pension income for the rest of their lives as a direct result of artificially depressed interest rates following QE.”

If nothing else, this makes the case for long term financial planning, and anyone with difficult decisions to make this year should certainly consider seeing a Certified Financial Planner.