Fears for annuity rates as govt extends QE

The Bank of England’s decision today to pump an extra £50bn into the UK economy is likely to drive annuity rates down further, insurers have warned.

Hymans Robertson partner Clive Fortes said the announcement has pushed gilt yields down to levels not seen since the late 1800s.

Andrew Tully, pensions technical director at MGM Advantage, said: "A number of factors determine annuity pricing, including the yields available on UK gilts.

"The latest round of quantitative easing (QE) will further impact gilt yields and will therefore drive down annuity prices."

Simon Healy, head of savings at Aldermore, warned that 2009's round of QE did serious damage to annuity rates.

"When quantitative easing was first introduced, it had the knock-on effect of reducing annuity rates by 6%. Now they are likely to fall further still," said Healy.

Fortes said that, although he expects the latest round QE will not have as much impact on gilt yields as the first and second rounds, it will lengthen the wait until yields begin to rise again.

Experts have urged pensioners and people approaching retirement to take action to mitigate the effects of QE.

Tully said: "For people who choose an annuity, shopping around for the best rate is now more important than ever, with many more people qualifying for enhanced rates due to medical or lifestyle conditions."

Patrick Bloomfiled, partner at Hymans Robertson, said: "If higher inflation happens as well, retirees will need to think carefully about whether they should be inflation-proofing their retirement income.

"Most annuities offer either a flat rate, or an annual payout that increases with inflation. Retirees who opt for the latter would likely benefit as a result of a new round of QE, while those who have not are likely to suffer the effects of higher inflation reducing their spending power."

Tom McPhail, head of pensions research at Hargreaves Lansdown said: "If you are planning to buy an annuity this year then it may well make sense to get on with it as all the immediate pressure on rates is downward.

"In the longer term we may see rates recover but there is no telling by how much or how long we might have to wait."