The Oldie (Feb 2012) – Annuities theft
by Dr. Ros Altmann
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Why is the Bank of England so insistent on bashing our Oldies? Many people recently or soon-to-be retired have been hurt by the Bank’s policy of electronic money-printing known by the catchy name of ‘Quantitative Easing’ (or QE in the jargon).
So far £275bn of ‘magic money’ has been created and the Bank has just announced plans to conjure up another £50bn, which will be used to continue buying up government bonds (gilts). QE is actually a massive monetary experiment, supposedly designed to provide a temporary boost to the flat-lining economy by driving down bond interest rates, to help borrowers borrow more easily from the banks. Sadly, it seems the banks are not playing ball and the money received by sellers of gilts is not actually finding its way to the parts of the UK economy, such as smaller companies, that would boost growth. In fact, there is precious little evidence that QE is actually helping economic activity, but there is plenty of evidence that it is damaging older people. For example, via its impact on the annuity market, QE has already permanently impoverished over a million pensioners.
An annuity is the pension income that an insurance company sells you in exchange for your lifetime pension savings. Essentially, the annuity income you can get from your pension fund is related to interest rates on Government bonds – the lower the interest rate on these gilts, the lower your pension will be. And an annuity is for life – once bought it can never be changed. So if you buy your annuity when interest rates are unusually low – as they are now as a result of Bank of England’s QE gilt-buying – your pension income will stay low for the rest of your life.
Since 2008, annuity rates have fallen by 25%, most of which is directly due to QE. Before QE started, you could have got around £7,800 a year pension income from £100,000 of pension savings. Now, a £100,000 pension fund will buy only around £5,800. So those coming up for retirement will have a much lower pension for ever.
This is not a small problem. Nearly half a million annuities are bought each year and 2012 is a bumper year for people reaching age 65 (due to the baby boom after WWII) so record numbers of people will be locking into a poorer pension for life due to QE. The Bank of England is permanently impoverishing a cohort of older people.
And it’s even worse than this. Almost every annuity sold has the income level fixed for life – with no increase for inflation. But the Bank of England’s monetary policy also aims to increase our inflation rate. This helps borrowers, but it whittles away pensioners’ purchasing power year by year. Just since Northern Rock failed, the pensioner inflation rate (calculated by Saga) is up over 20%. So if you did buy an annuity in 2008, the real value of your pension income has already fallen by a fifth.
So there we have it. The Bank of England’s grand plan to stimulate our economy amounts to an assault on the Oldies of our nation. Take away savings and pension income from those who have prepared for retirement and transfer the money to over-indebted borrowers and banks.
Is anyone safe from this Orwellian Oldie onslaught? Well, workers in the public sector – including Bank of England staff – have pensions which are fully guaranteed by taxpayers, fully inflation-linked and are not dependent on buying annuities, so they are pretty immune from the harmful effects of QE. Wow, what an odd coincidence.