Why today's Bank of England announcement is bad news for retirees

by Simon Ward on 09 February 2012  |  13 comments
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The Bank of England is pumping another £50 billion into the economy, but this is bad news for many older people.

The Bank of England has today announced that it’s pumping a further £50 billion into the economy via a third bout of its quantitative easing (QE) programme. It has also left the base rate unchanged at its record low of 0.5% for the 35th consecutive month, although that has been somewhat sidelined by the QE announcement.

The Bank is continuing to try to kickstart an economic recovery by buying up Government bonds (also known as gilts) and other corporate assets back from banks and pension funds, giving them an injection of funds. The theory goes that this will then get them lending to both businesses and us, the public.

But its decision is bad news for many pensioners and people about to retire. Why? Because buying back gilts means the yield will fall. And part of the income pensioners receive from annuities is from the yields on gilts. So, lower yield, lower annuity income.

And if you’re about to retire, the new is arguably even bleaker. Figures from financial services company Hargreaves Lansdown show that annuity rates have plunged in recent years. Add to this the higher cost of everyday basics such as food, energy bills, petrol and clothing and the picture isn’t very rosy.

Hargreaves Lansdown found that a 65-year-old man with a £100,000 pension pot buying a level, or fixed, annuity in 2008 would have received an income of £7,855 a year. However, that income today would be just £5,923 a year, a 25% drop.

Experts are now saying if you need to buy an annuity, then it’s a good idea to get on and do it sooner rather than later. Use our free annuity calculator to help you search the market and get the best deal.

And, of course, the low base rate means savers will still struggle to get a decent return on their money.

Better news for borrowers

However, the new injection of money into the economy could provide better news for people looking to take out a mortgage. Firstly, there’s the injection of new money onto banks’ balance sheets, which gives them the opportunity, in theory, to offer more credit to us. However, there has been criticism that banks have actually just sat on the cash. They have argued back that the ongoing crisis in the Eurozone has meant that they have had to tread carefully and increase their reserve ratios.

There’s also the fact that the interest rates on fixed-rate mortgages are linked to the interest rates (yields) on Government bonds. So if they drop, which they will if more are bought, then the theory runs that mortgage interest rates could also drop, meaning cheaper fixed rates.

The banks’ cash injection could also make it easier to borrow via credit cards and loans. One of the obvious aims of the Government’s QE programme is to boost spending and, therefore, growth.

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

More: Annuity mess cuts average pension by 30% | How to boost your pension by 40%