Pensioners could soon get a reduced income when buying a retirement cash stream, experts warn.
It is feared rates on annuity plans – where you give your pension pot to an insurance company in return for a regular income – will fall following yesterday's decision by the Bank of England to pump an extra £75 billion into the financial system via quantitative easing (QE).
One of the impacts of QE, which is effectively the printing of money, is it forces down the return on gilts – which are government-issued bonds the Bank buys with that cash – as the demand for them rises.
Annuities are partly priced on gilts, so if yields fall, annuity providers will pay out less. As a result, pensioners could get less when buying an annuity.
According to data from pensions provider Hargreaves Lansdown, when quantitative easing happened in 2009, there were 18 annuity rate cuts.
Tom McPhail, from Hargreaves Lansdown, says a similar situation could happen again. He warns: "Don't delay buying an annuity in the hope of a short term bounce in rates. It may happen but there is no strong reason to expect it."
If you are considering buying an annuity, remember to scour the market first to find the best rate. Don't automatically take one from your pension provider as the chances are it won't pay the best income.