Quantitative easing is hitting annuity buyers in the pocket

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WORKERS nearing retirement have been urged to consider their options carefully after the Bank of England's £75 billion cash injection sent annuity rates plummeting.

Under its "quantitative easing" measures, implemented on Wednesday, the bank is to invest 75bn in gilts (government bonds) in a bid to boost money supply.

But many people approaching retirement and intending to buy an annuity to provide a regular income for the remainder of their lives will receive a lower income because the 75bn cash injection is driving up the cost of gilts and sending the rate of return from them plummeting.

Insurers rely heavily on those returns to fund annuities, which most people opt for on retirement, meaning that annuity rates are also falling. They have now fallen by around 10 per cent from a six-year high last summer and Nigel Callaghan, pensions analyst at Hargreaves Lansdown, said most insurers will be forced to further reduce the rates they pay on annuities.

Some, including Norwich Union and Legal & General, have already cut annuity rates since the quantitative easing programme was announced nine days ago.

But those nearing retirement can offset the losses by shopping around for their annuity, said Callaghan. He pointed out that, while today's rates are 10 per cent down from last summer, retirees can boost their retirement income by up to 20 per cent by using the open market option to find the best annuity available to them. "It might seem counter intuitive, but retiring investors must shout about any lifestyle or medical issues, as this can massively boost their pension income," Callaghan added.

Some retirees are taking a more flexible approach to how they take their retirement income. For example, instead of buying one annuity, it is possible to divide pension savings to buy several annuities over several months or years. The idea is that by leaving some pension savings invested for longer, investors can give themselves some protection against volatile annuity rates and inflation.

"More investors are mixing and matching between annuities and drawdown to obtain a certainty of income for part of their funds, whilst being able to alter their income stream and remain invested," said Callaghan.