Annuity rates down 29%, pension funds up 63%

The real cost of quantitative easing for those reaching retirement has been calculated as a 29% drop in income, according to new research.

AXA Life Europe found that annuity rates have fallen by nearly one-third since the start of the Bank of England programme of quantitative easing.

They found that a pension fund of £100,000 would have secured an annuity income of £5,040 a year at the start of the second quarter of 2009.

Once the £375bn of quantitative easing had taken place, this same £100,000 pension fund would only have bought an annuity of £3,580 a year, a reduction of £1,460 a year.

Based on a 25 year life expectancy for someone entering retirement, this fall in annuity rates could cost as much as £36,500 in lost income.

Quantitative easing is designed to lower gilt yields, in order to make it cheaper for the government to borrow more cheaply.

These lower gilt yields mean lower annuity rates, as this is one factor on which annuity rates are based, along with life expectancy and financial solvency rules.

Of course the investor who had a £100,000 pension fund in 2009 might have had a larger pension fund in 2013.

Because quantitative easing also pushes up asset values, a pension fund invested in the FTSE 100 index of leading UK company shares would have risen by 63.3% between the start of April 2009 and the start of April 2013.

This means that the notional pension fund would have been worth £163,300 buying an annuity of £5,846 a year, an increase of £806 on the amount you could have secured in 2009.

Of course you also would have missed out on annuity income between 2009 and 2013, four years of income worth £20,160.

The research from AXA Life Europe demonstrates the impact of QE on gilts without properly considering its impact on other relevant investment assets.

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