WHEN will policymakers stop damaging savers and pensioners? It is more than three years since the Bank of England brought interest rates down to record lows and introduced its policy of quantitative easing (QE).
Such policies amount to a stealth tax on savers and pensioners, surreptitiously reducing their incomes. Ultra-low rates have significantly reduced savers’ incomes, while QE has boosted inflation. This combination of high inflation and low interest rates is toxic for savers, as each year the real value of their money falls.
QE is, in fact, a monetary experiment. It entails creating new money to buy government bonds, called gilts. So QE is just a fancy name for printing money and so far the bank has created the eye-watering sum of £325 billion – nearly a third of our national output. The bank admits it does not really know whether the policy will work, but it has ploughed on anyway, in an effort to revive the flagging economy.
In theory, the bank believes creating new money and forcing down interest rates will help borrowers repay their debts and lead to more bank lending, which will help growth.
In practice, however, bank lending is falling and we are back in recession. So, there is precious little evidence that this policy is working and I believe it is possible that QE has actually harmed our economy, rather than boosted it.
In fact, the bank has ignored the damage its policies have caused to older generations in general and pensions in particular. Anyone recently or soon-to-be retired is at risk of lower retirement income as QE has damaged pensions, pensioners and annuities and caused higher inflation.
Why is the bank ignoring these negative side effects of its policies supposedly designed to boost growth? It does not seem to recognise that QE is a threat to all our pensions.
Government bond yields underpin the UKs pension system and, as gilt interest rates fall, pensions fall. Every year, nearly half a million people with personal pensions buy an annuity on retirement that provides a fixed pension income for the rest of their life. As the bank has bought more gilts, it has forced down their interest rates, which has reduced annuity rates and means the pension income people can get from their pension savings has fallen sharply.
Since QE started, annuities have fallen by more than 20 per cent because of the fall in gilt yields. In 2008, a £100,000 pension fund would buy an annuity income of £7,000 a year. Now a £100,000 pension fund would only buy an annuity pension income of about £5,400 a year.
So, since 2009, QE has already made more than a million pensioners permanently poorer. And 90 per cent of pensioners have bought a fixed annuity which pays an income that does not increase in line with inflation. So, as inflation rises each year, they become even poorer over time. In other words, QE’s “temporary fillip” to our economy is causing a significant permanent reduction in spending power for our aging population.
It is not just QE’s impact on annuities that has acted like a stealth tax. Those who decide not to buy an annuity but choose to leave their pension money invested in an income drawdown fund, have also had their income reduced. The amount the government allows them to withdraw each year is linked to the level of gilt yields. The lower the interest rate on gilts, the lower the pension income they can take out of their pension fund.
So, someone who could take an annual income of £5,000 before QE, may now only take out around £4,000. Many thousands of pensioners are seeing their income fall sharply as a result.
QE has damaged company pension schemes, too. The lower the interest rate on gilts, the worse pension fund deficits become. As deficits grow, the employer has to put in more money to make up the shortfall, rather than using its resources to grow its business or create new jobs.
Many companies are also finding it harder to borrow as a result of pension problems and some have gone bust as they could not make up their deficits, leaving pension scheme members facing reduced pensions in the Pension Protection Fund.
The bank’s policy amounts to a transfer of resources from older savers and pensioners, to younger borrowers and the banks. It leaves those near or in retirement suffering real-terms cuts in their incomes.
Just like a tax increase, low interest rates and QE reduce savers’ and pensioners’ incomes. Imposing such stealth taxes on older generations is not a recipe for economy recovery. The sooner the bank recognises the long-term dangers of continuing QE, the better all our futures will be.
• Dr Ros Altmann is chief executive of Saga and an expert on issues that affect older people
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