In the wake of any financial crisis there are bills to be paid. Someone has to pay them. The question is, who? In Britain, someone up high has clearly decided it might as well be the retired and the nearly retired. If you’re trying to live off your savings or a fixed income of any kind, you’ll be having a tough time. The lowest interest rates in many hundreds of years, along with the highest consumer price inflation in a decade, are destroying your purchasing power. According to the Office for National Statistics, the cost of living for pensioners has risen by more than 20% since the financial crisis began in 2008. No pensioners have seen their incomes rise by anywhere near that amount.
If you’re on the verge of retiring, you could be in for an even nastier shock. Why? Because low interest rates also mean low annuity rates. The aim of quantitative easing (QE) is to push down long-term interest rates. The Bank of England creates money and uses it to buy gilts. When it buys gilts, the price goes up and the yield goes down. As the gilt yield is the effective long-term interest rate for lots of other things, this is supposed to push down rates and encourage growth.
That’s nice for the banks and for anyone who can borrow money. But it isn’t so good for anyone buying an annuity priced off long-term gilt yields. Since the first round of QE in March 2009, the gilt yield has fallen from around 4.4% to 2.5%, and the latest round hasn’t helped. The upshot is this: if you’d had £100,000 to buy an annuity with in early 2009, you’d have been able to buy an annual income of £6,200; now it will be under £5,400.
Miserable isn’t it? But there’s more. You don’t have to buy an annuity, but can choose income draw-down. This lets you take 25% of your pension fund as a tax-free lump sum, leave the rest invested and withdraw it gradually. It used to be that you could withdraw the remainder at a rate of 120% of the equivalent annuity income you could have bought on the open market a month. That’s now been cut to 100% for those who don’t havean income of at least £20,000 from other sources.
If this all seems unfair, it’s because it is. But the rest of us aren’t getting off scot-free. The younger generation might be benefiting from ultra-low mortgage rates, but what the crisis gives, it also takes away: real wages haven’t risen in a long time and this year alone 200,000 people have applied for loans from Wonga (at an interest rate of 4,214%) in their lunch hour. Borrow £100 at that rate, fail to pay it back for seven years and you’ll owe more than the US national debt. Pensioners may be paying the heaviest price for the crisis so far – but we are all paying something.by Merryn Somerset Webb