QE: What it Could mean for your Pension

4th July 2012

The Bank of England is poised to extend quantitative easing (QE) with a further £50bn expected to be announced on Thursday.
Under the QE we’ve already seen, the UK’s base money supply has already been tripled, as a percentage of GDP, in less than three years, and it is anticipated that the Chancellor is expected to announce a further tranche of quantitative easing (QE) on Thursday, flooding the market with an expected £50bn. This means bad news for pension savers.

Annuities

The UK’s pension annuity rates have been in meltdown for the past four years.

Annuities are mainly based on the yield of gilts. This is likely to fall further following an announcement of additional QE.
The following illustrates the current and possible consequences of this:

In July 2008 a 65 year old man could have secured a rate of 7.855pc for a level annuity; today the rate for a 65 year old man stands at 5.743pc. In June 2012 there was 16 annuity rate cuts. A further fall in gilt yields following an announcement of additional QE and in a short space of time this would be expected to feed through into lower annuity rates – again.

For investors who are willing to wait for an uncertain period (possibly years), there is the option to delay annuity purchase and wait for yields to recover.

Final Salary pension schemes

The Pension Protection Fund (PPF) reported in June that s at the end of May 2012, the UK’s final salary scheme sector aggregate deficit stood at £312.1bn, with a funding ratio of 76.8pc. Total assets were £1030.8bn and liabilities were £1,343bn.
Any fall in gilt yields would be likely to exacerbate this deficit situation. According to the PPF, a 0.1pc reduction in gilt yields increases scheme liabilities by 1.8pc. It also increases the value of scheme assets by 0.4pc.

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