Quantitative Easing leaves new pensioners permanently worse off by driving down annuity rates, and is also hitting final salary pension schemes, it has been warned

THE Bank of England’s latest dose of emergency medicine for the UK’s ailing eocnomy will leave those approaching retirement in pain for the rest of their lives, pensions bodies have warned.

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The National Association of Pension Funds (NAPF) said retirees would find that annuity rates, which set the size of their pension for life, have been “squashed” by QE.

The body said the Bank of England’s decision to inject a further £50billion into the economy would also cause a “headache” for companies running final salary pensions and could lead to more schemes being shut.

Joanne Segars, chief executive of the NAPF, said the last hit of QE increased pension fund deficits by an estimated £45billion, and the latest round “will only add to that bill”.

She said: “Our priority has to be a stronger economy, so we understand the bank’s case for more medicine. But this short-term stimulus is leaving pensioners and pension funds in long-term pain.

“People who are retiring now are finding that annuity rates have been squashed by QE, and that they will get a smaller pension than they expected.

“Retirees who get locked into a weak annuity will find that the bank’s money printing leaves them out of pocket for the rest of their lives.”

She said that for companies running final salary pensions, “QE is a headache which pushes their pension funds further into the red”.

“This means businesses have to put more money into their pension schemes, instead of spending it on jobs and investment. Our fear is that firms struggling with a weak economy will simply choose to close their pension schemes,” she added.

“We think the last hit of QE increased pension fund deficits by around £45billion, and the latest tranche will only add to that bill.”

Annuity investors have seen rates plummet in recent years, as pensioners have faced a “perfect storm” of high living costs and low returns on their savings.

Comparison website Moneyfacts has said that annuity incomes fell for the fourth year in a row in 2011.

And research from financial services company Hargreaves Lansdown found that a 65-year-old man with £100,000 could have bought a level income of £7,855 in July 2008, but someone in the same situation today would only receive an income of £5,923, a drop of just under 25%.

A recent study from Prudential also found that the typical retirement income anticipated for 2012 had hit a five-year low of £15,500, while one in five of those retiring this year expected to have to get by on less than £10,000.

A key factor in the drop was the continued fall in the value of the annual pension that could be bought by a lump sum saved in a private pension fund, or the annuity rate.

This has been put down to people living longer, as well as reductions in the return, or yield, available from buying the government and company bonds needed to provide a guaranteed income in retirement.

QE makes it cheaper for companies to borrow by pushing down the yield on government bonds, but annuity incomes are also based on these yields, meaning new pensioners see their incomes reduced.

The policy also impacts on inflation, meaning pensioners can also face higher living costs.

Dr Ros Altmann, director general of Saga, said the Bank of England had “failed to see sense after all”.

She said: “Announcing a further £50billion purchase of gilts is not the right medicine for our economy. In fact, it is more likely to damage growth than boost it.

“The sums of money involved here are so huge, but this is still just an experiment. QE has not worked. The jury is still very much out on whether QE is actually providing an economic stimulus.”

Dr Altmann said the Bank of England may have backed itself into a corner. She said: “The Bank of England may, in fact, feel it is in a bit of a fix, frightened that, if it does not keep on buying gilts, yields on Government bonds will rise, which will make the fiscal deficit harder to finance and damage the economy. But this is just a vicious circle.”

Tom McPhail, head of pensions research at Hargreaves Lansdown, advised those planning to buy an annuity this year to “get on with it” as the immediate pressure on rates was downward.

He said: “In the longer term we may see rates recover but there is no telling by how much or how long we might have to wait.

“If investors want to stand any chance of getting the best retirement income terms for themselves then it is imperative that they shop around in the run up to retirement.”