What is QE3? - What is Quantitative Easing And How Will It Effect You And Me?
The use of Quantitative Easing by the Bank of England may lead to a 60 basis point decrease in gilt yields then annuity rates decreasing by 6% during 2012 and will mean less income for retiring pensioners that have to buy an annuity now.
The loss of annuity rates due to Quantitative Easing could be besides the 11% decrease already gone through by pensioners since June 2011 as a result of Eurozone crisis where investments happen to be transferred to safe havens for example UK government bonds or gilts.
Gilt yields fall when need for gilts increases so when prices increase it lowers the yield meaning the return on those assets falls. Annuity providers use 15-year gilts to secure the income for pensioners so that as a broad rule a 60 basis point lowering of gilt yields will result in a 6% decrease in annuity rates, however, there might be a time lag prior to the changes are implemented through the providers.
what is quantitative easing
Quantitative Easing (QE) was introduced in March 2009 together the effect of reducing annuity rates by 6% during that year. QE was initiated as a result of the economic crisis requiring the Bank of England to inject money straight into the economy and they are doing this how to fulfill the Monetary Policy Committee inflation target of 2%. The other strategy to accomplish this target is simply by setting the lender Rate which is very low at 0.5% and thus Quantitative Easing may be the only way to fulfill the inflation target.
After 2011 inflation, such as the Retail Price Index (RPI) fell from 4.8% to 4.2% and if this will continue to fall at 0.6% each month chances are it will fall underneath the inflation target of 2%. Therefore the Bank of England is planning to inject £75 billion from February 2012 onwards and possibly up to £100 billion more during the year if required.
The financial institution of England intends to use Quantitative Easing to stimulate consumer spending and company investment. By purchasing government bonds or gilts the general effect would be to reduce the yield so encourage investors to modify from bonds or gilts to other financial assets including company bonds which often will reduce the yield on these assets. This ultimately is expected to lessen the price of borrowing for both the consumer and business and encourage spending as a result of extra money throughout the economy which assists to increase inflation to fulfill the 2% target.
Quantitative Easing also has consequences for defined benefit or final salary schemes supplied by employers as gilts are employed to determine the long run funding provisions of these schemes. Since the yields decrease an organization might find the final salary scheme deficit increases and so the company will at some stage need provide extra funds for your pension scheme instead of by using these funds for other investments for example employing new people.
The financial institution of England is utilizing QE to profit the wider economy nevertheless the complication is going to be decreasing annuity rates for pensioners that are already suffering from lower incomes as a result of increasing inflation and QE will further reduce their buying power throughout their lifetime. To counter these negative factors pensioners can maximise their income when they have medical ailments that could add 20% to 60% to the annuity rate by ordering an impaired health annuity.