Will incoming BoE Governor’s plans make retirees poorer?
The pension funds of older workers could be dealt another hammer blow whenMark Carney begins his new role as Governor of the Bank of England, I suspect.
Why? Because during his final speech as the Governor of Canada, Mr Carney praised Japan’s “bold policy experiment” to increase its programme ofQuantitative Easing (QE). This suggests that as part of efforts to stimulate the UK economy, more money printing, or QE, should be expected when he takes over from Sir Mervyn King as the Bank of England Governor on 1st July.
Should this happen it would hit those workers who are on the verge of retirement because quantitative easing forces down annuity rates, which have already reached historic lows. As rates drop, retirees taking out annuities are locked permanently into lower pension payouts.
Annuity rates are in part determined by the yield on government bonds, or gilts. QE creates money that allows the Bank to buy gilts which pushes up their value but which slashes their yield to investors.
With further quantitative easing seeming more and more probable, meaning even lower annuity rates, older workers will need to carefully consider their options.
I imagine that many are likely to increase their exposure to investment risk in retirement in order to obtain a better return and be able to fund the retirement they had anticipated.
Whilst others will refrain from purchasing an annuity altogether and instead take capped income drawdown from their pension which can be re-valued every three years, or transfer to a SIPP or QROPS (Qualifying Recognised Overseas Pension Scheme) if they are non-UK residents.
Seeking financial advice is recommended to ensure those nearing retirement adopt the most appropriate solutions for their individual needs.
Nigel Green deVere Group
Blog written 23rd May