Experts warned that returns on annuities had fallen so low that people about to retire should seriously consider investing their pension funds elsewhere.
Many pensioners use their retirement pot to buy an annuity, a guaranteed lifetime annual income based on the yields on government bonds, or gilts.
The Bank’s Quantitative Easing (QE) programme has put £275billion of new money into the economy, created by it buying gilts from commercial banks. Increased demand for gilts pushes down the yield, or interest rate, paid to holders, lowering borrowing costs across the economy and stimulating demand.
Campaign groups, including Saga, have warned that lower gilt yields undermine pension incomes.
Research by the Bank’s economists yesterday estimated that the QE programme reduced gilt yields by around 1.5 percentage points in 2010 alone.
Falling yields have contributed to the long term decline in annuity rates, which is also driven by rising life expectancy.
Twenty years ago, a pension pot of £100,000 would have bought a 65-year-old man an annuity paying an annual income of £15,640 a year for life. Today, the same fund would buy an income of around £5,800 a year.
Billy Burrows, of the Better Retirement Group, suggested rates were nearing a “tipping point” where investing solely in a conventional annuity was of little use.
One option suggested by advisers is for people to put some of their pension pot into an annuity but to place the rest in higher-return, higher-risk investments.
Steve Lowe, of Just Retirement, said people must think more creatively than just delaying buying an annuity in the hope rates recover, because it is unlikely. They “might just as well sprinkle fairy dust on their pension and hope this boosts their retirement income”, he said.
Ministers are drawing up plans to offer some help.
Source: Pensions Insight
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