Five questions answered on falling pensions

A seven per cent drop in the value of annuities.

Photograph: Getty Images

A quarterly report from annuity provider, MGM Advantage, says the value of annuities has fallen by seven per cent in the last three months, significantly reducing the value of people’s pensions.

First of all, what are annuities?

Annuities are what a person purchases with the proceeds of their pension investment and determine a saver’s income for the rest of their life – what they will be paid out each year. However, the value of annuities has significantly fallen due to the government’s continued quantitative easing programme.

Why are annuities affected by quantitative easing?

Quantitative easing is used to stimulate the economy. It is when the government electronically prints money to buy government bonds, also known as glits. The higher the demand for glits the lower the interest rate for loans falls, which in turn pushes down the value of pensions because the majority of pension funds are heavily invested in government bonds. As they are receiving a lower yield on their investment the amount they can pay out as annuities is in turn lowered.

So what does this mean in real terms, as in money in a person’s pocket?

Currently if you had £50,000 pension you would be able to buy an annual income of £2,579, which is down from £2,778 in July – a decrease of £199.Although, this may continue to decrease as annuities continue to fall.

What can be done?

Investing time searching for the best annuity payout is currently the best thing to do. Or, if at all possible, avoid cashing in a pension until interest rates improve.

 What's the forecast for the future?

With more quantitative easing planned interest rates are expected to fall further in the coming months. MGM Advantage described them as being in a ‘free-fall’.

Lord McFall, the former chairman of the Treasury Select Committee told The Telegraph:

“I think this is an issue which the pensions minister should be looking at. Particularly how you provide people with some comfort as to the risks that they are exposed to. An initiative from the Government is needed.”