Why the ongoing recession may kill your pension
So what's going on? How can the recession kill your pension? And what can you do about it?
GDP shockThe GDP figures this month revealed a horrifying 0.7% fall in growth in the previous quarter, cementing the UK firmly in recession with its third consecutive quarter of shrinking output. This was even worse than the carnage the economists had been predicting.
The effect on consumers is likely to be exceptionally painful. Coming on the back of so many years of tough times, this could be the nail in the coffin for hundreds of businesses,
Alessandra Quartucci, Head of Savings, Mortgages & Current Accounts at Confused.com says: "What recession means to British consumers is potentially more redundancies by companies, salary cuts or increased difficulty in finding new jobs."
Pensioner painHowever, Nigel Green, chief executive of wealth managers, the deVere Group, warns that it will also be devastating for pensioners. The problem is that the recession may force the Bank of England to try to stimulate the economy again, by announcing a further round of Quantitative Easing (QE) as it has shown a willingness to "pump money into the economy whenever it falters."
Green says: "As such, we forecast that the Bank of England will expand its QE programme by an additional £50 billion when the current asset purchases – also £50 billion- are completed in November."
The effectsThis in turn would be terrible news for pensioners. Those who are already retired face the increased risk of inflation - pushed up whenever money is pumped into the economy. Those on a fixed income will find their money goes less and less far each month.
Those who are retiring now, however, face the biggest blows. He says: "Another round of QE, like the ones before, will make the vast majority of those who are nearing retirement now, permanently poorer as it will further slash annuities – which are already at historic lows."
Annuities are based on gilts, meaning the more expensive they are, the less income investors will receive in return for their pension fund.
"By damaging pensions and pension funds, and increasing inflation, QE, a supposed 'stimulus', could in fact have the opposite effect of what it is intended to do. Quite clearly, it could hinder economic growth by impoverishing millions of British retirees," adds Green.
Dr Ros Altmann, Director-General of Saga agrees: "QE has reduced over a million pensioners' incomes via annuity and drawdown income falls. These effects destroy jobs and growth as they reduce spending for a growing proportion of the population, so it seems that policies designed to provide a temporary boost to our flagging economy could have actually had the opposite effect."
She argues that the policy needs rethinking as it doesn't seem to be working. She says: "The Bank of England needs to stand back and examine whether this policy, which it has always admitted is just an 'experiment', is working and is acting as a stimulus for growth."
So what can you do?There's little you can do about the economy, but your pension is within your control. If you have a while to retirement, there will be every chance for annuity rates to recover. In the interim, you can do your bit by revisiting how much you are putting into your pension (if any) and asking yourself whether there's any way to free up more cash for the future.
If your retirement is imminent, then you may have to bite the bullet. Tom McPhail, Head of Pensions Research says: "If you are planning to buy an annuity this year then it may well make sense to get on with it...There exists the outside possibility that the economic outlook and market sentiment could change radically, driving Gilt yields and annuity rates back up again. Unless this happens, the combined effect of QE, European regulation, uncertainty caused by unisex pricing and on-going life expectancy improvements are all likely to keep pushing rates down through 2012."
He adds: "If investors want to stand any chance of getting the best retirement income terms for themselves then it is imperative that they shop around in the run up to retirement."
Of course, there remains the possibility that we can keep on working, and put off retirement for a year or so until we have more in the pot and rates improve.
It's hardly an attractive prospect though...