A new report from the Treasury Select Committee suggests pensioners deserve compensation after suffering as a result of quantitative easing.
The Government should consider compensating pensioners and savers who have been left worse off as a result of the Bank of England’s quantitative easing (QE) programme.
That’s the suggestion of the Treasury Select Committee, which has today published its verdict on the 2012 Budget.
The findings were damning. Among other recommendations, the paper cautioned the government on the effects of a low base rate and quantitative easing programme on pensioners and savers. It states:
“Loose monetary policy, achieved through quantitative easing and low interest rates, has redistributional effects, particularly penalising savers, those with ‘drawdown pensions’ and those retiring now.”
Penalised
Since March 2009, the Bank of England has kept the base rate at an all-time low of 0.5% and has injected £325 billion of new money into the UK economy (by printing new money) in an effort to revive consumer spending and kick-start the economy.
The idea behind these measures is to get people to stop holding onto their money in savings and to start spending to stimulate growth.
But as the base rate remains at a record low for the 37th consecutive month and a third round of quantitative easing is embarked upon, are savers and pensioners being unfairly victimised?
QE damages annuities
While the Bank of England appears confident about the benefits of QE and the Government continues to urge patience, pensioners and savers can expect difficult times. The report predicts:
“Under this policy, savers receive a far lower return on their savings than under more normal conditions. Meanwhile the returns that new pensioners will receive on their annuities have also been badly affected.”
In short quantitative easing is damaging annuities for those who are going to or are about to retire.
Quantitative easing is a method brought in by the Bank of England to inject money into the economy. The programme operates on the bank buying Government bonds (also known as gilts) and other corporate assets with new money.
While this is intended to give banks more money to (in theory) lend to businesses and consumers, this has a direct impact on pension annuity rates, as we explained in Why printing money is bad news for pensioners.
Today annuity rates are significantly lower than they were five or six years ago and quantitative easing will pull them down even further.
Once you reach the age of retirement the money held in your pension pot is converted into an income stream of a fixed amount every year calculated on the annuity rate you choose. These rates decide how high or low your pension will be; determining how comfortably you will be able to live out the rest of your life. For more on how to pick an annuity, check out Boost your pension by 40%.
So pensioners, who are already bearing the brunt of a rise in the cost of living, also have face the prospect of a cut in their annual income because of the plunge in annuity rates on offer. It paints a bleak picture for the future.
Recommendations
There seems to be no bright side to this policy for pensioners and savers, but the report did contain one interesting recommendation:
“We recommend that the Government consider whether there are any measures that should be taken to mitigate the redistributional effects of quantitative easing, and if appropriate consult on them at the time of the Autumn Statement.”
What should these measures to mitigate be? Compensation? A reversal of the QE policy?
So what are your thoughts? Is QE justified? And should pensioners and savers be compensated?
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