The usage of Quantitative Easing from the Bank of England could lead to a 60 basis point lowering of gilt yields then annuity rates decreasing by 6% during 2012 and will mean less income for retiring pensioners that have to purchase an annuity now.
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The loss of annuity rates because of Quantitative Easing could be in addition to the 11% decrease already gone through by pensioners since June 2011 as a result of Eurozone crisis where investments are already moved to safe havens for example UK government bonds or gilts.
Gilt yields fall when interest in gilts increases so when prices increase it cuts down on the yield which means the return on those assets falls. Annuity providers use 15-year gilts to secure the income for pensioners and as a broad rule a 60 basis point reduction in gilt yields will lead to a 6% decline in annuity rates, nevertheless, there might be a time lag ahead of the changes are implemented from the providers.
Quantitative Easing (QE) has been around since March 2009 and had the consequence of reducing annuity rates by 6% in that year. QE was initiated as a result of the financial meltdown requiring the financial institution of England to inject money into the economy plus they are doing this now to meet the Monetary Policy Committee inflation target of 2%. Another strategy to accomplish that target is as simple as setting the bank Rate which is suprisingly low at 0.5% and thus Quantitative Easing is the best way to fulfill the inflation target.
After 2011 inflation, like the Retail Price Index (RPI) fell from 4.8% to 4.2% of course, if this continues to fall at 0.6% monthly chances are it will fall beneath the inflation target of 2%. And so the Bank of England is intending to inject £75 billion from February 2012 onwards and possibly as much as £100 billion more during the year if required.
The financial institution of England promises to use Quantitative Easing to stimulate consumer spending and company investment. By purchasing government bonds or gilts the general effect is always to lessen the yield so encourage investors to modify from bonds or gilts to other financial assets including company bonds which will reduce the yield on these assets. This ultimately is predicted to cut back the price of borrowing for the consumer and business and encourage spending because of the extra cash in the economy which supports to increase inflation to fulfill the 2% target.
Quantitative Easing also has consequences for defined benefit or final salary schemes supplied by employers as gilts are used to determine the near future funding provisions of these schemes. As the yields decrease an organization may find the final salary scheme deficit increases and then the company will at some stage need provide extra funds for the pension scheme instead of by using these funds for other investments such as employing new people.
The bank of England is utilizing QE to learn the wider economy nevertheless the complication will probably be decreasing annuity rates for pensioners which are already experiencing lower incomes due to increasing inflation and QE will further reduce their buying power during their lifetime. To counter these negative factors pensioners can maximise their income when they have medical ailments which could add 20% to 60% towards the annuity rate by ordering an impaired health annuity.