12 June 2012 last updated

Retirement income from annuities could be hit with new QE measures

Annuities are likely to decrease if the Bank of England injects money through Quantitative Easing resulting in lower retirement income for pensioners. Pensioner income from July onwards could reduce still further with lower annuity rates if the bank of England expands Quantitative Easing (QE) which is currently held at £325bn. This would involve the Bank of England injecting money into the economy by buying UK government bonds and gilts forcing the price up and reducing the yields. This measure could be necessary as manufacturing output reduced by 0.3% compared to a year ago according to figures released from the Office for National Statistics (ONS). Poor manufacturing output would help to continue the recession throughout the summer and without further lending from banks would make it difficult to stimulate growth.

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Annuities could fall with Bank of England action

As a result of a new QE programme from the Bank of England and lower gilt yields pensioner income from retirement annuities would reduce below the current lowest levels ever recorded. Annuity rates have been reducing since the financial crisis first started in 2008 when annuity rates reached a high point.

Then a male aged 65 with a fund of £100,000 could purchase a pension annuity with a retirement income of £7,908 per year and this has since reduced to only £5,962 per year, a fall of £1,946 pa or almost 25% in only four years. Gilt yields are affected by the Eurozone crisis and if this was combined with another injection of QE annuity rates could reduce even further.

The 15-year gilt yields have increased today by 5 basis points to 2.25% although there remains uncertainty over the Spanish 100bn euro banks bailout. Spanish 10-year bond yields have increased to an unsustainable 6.72% and Italy's 10-year bond yields have increased to 6.22% adding to their growing debt problem. Equities were buoyant with the FTSE-100 index up 41 points at 5,473 and the Dow Jones up 162 points at 12,573 as rumours that the Federal Reserve may announce a stimulus package next week to help generate new jobs.