This year, 800,000 people will enter retirement age and begin drawing on any private pension funds that they have set aside. However, those that do could be earning as much as 20% less than those who began their retirement just three years ago.
This has all been revealed as shocking figures show just how much of a difference the Bank of England’s programme of quantitative easing (QE) has made to the interest rates that gilts offer. Many pension plans are heavily invested in gilts, which are a type of government bond. Companies can buy the bond from the government, which gives the government itself a cash injection, and then they receive interest paid on it each year.
However, in order to increase the amount of liquid capital that banks have available to lend, the Bank of England has been printing money and then using it to buy gilts from the banks themselves. This has meant that not only has the price of a gilt gone up, but that the interest paid out on them has dropped. Whilst it might be good news for borrowers, who can more easily get loans, pensions that rely on gilts for their return capital have been hit hard.
To illustrate the problem. A man who retired at 65 in August 2009 with £100,000 paid into his pension could expect to see £6,410 paid out to him each year. Somebody retiring this month with the same amount will only get £5,158 a year, which is clearly a huge drop. This difference adds up every year too, with somebody retiring this year seeing, on average, £22,500 less throughout their retirement than somebody who retired in August 2009.
The Bank of England maintains that QE has not hit pensioners too hard and that they would have been worse off had the Bank not stepped in to stimulate the economy. However, with figures like this coming out, it’s going to be hard for many retirees to agree with their position.