10 March 2009
According to industry experts, annuities could plunge in value
after the injection of £75bn into the economy by the Bank of
England. Insurance companies pay out annuities - a regular income
from a retiree's pension pot - based on the returns made from
government bonds or gilts. These returns have dipped dramatically
after the Bank of England said it was creating £75bn to buy these
gilts.
Annuity rates have dropped 8% since reaching a six-year high in
the summer of 2008. The Bank of England announcement to inject
£75bn directly into buying government and corporate bonds - known
as quantitative easing - meant the price of these bonds saw its
steepest rise for 17 years. But the returns from these bonds fell
significantly as a result, reducing the amount that will be paid
out to retiring investors in annuities.
There is a possibility of more money injections in the future as
Chancellor Alistair Darling has given the Bank of England
permission to extend this to up to £150bn.
