The decline in pension annuity rates caused by quantitative easing (QE) means it is more important than ever for employers to educate staff about the open market option.
In August, the Bank of England published a paper on the distributional effects of QE, which it estimates to have had a broadly neutral impact on the value of the annuity income that can be bought from a typical pension pot.
However, Laith Khalaf, pension investment manager at Hargreaves Lansdown, said government bond yields are at their lowest level for 300 years.
The open market option enables staff to shop around to secure the best annuity rate, rather than simply taking the default annuity offered by their pension provider. Khalaf said: “Because annuity rates are where they are, it is increasingly common for people to get good value from shopping around.”
Although all pension providers offer an annuity service, not all are competitive, said Khalaf. “There is quite a big difference in rates between the best and worst providers. We are talking about someone maybe getting 40% more retirement income, not by putting so much more into their pension, but by taking the really simple step of shopping around. This is a really big decision, so it is a total no-brainer to [do so].”
When employees shop around for an annuity, it is not just a question of getting the best rate, but also the right rate, for instance a single-life annuity, one that is connected to a spouse’s pension, or an inflation-linked annuity.
“The thing about an annuity is that [employees] purchase one at the point of retirement, and that’s it,” said Khalaf. “It is a one-off decision that cannot be reversed. It is really important that people spend time [considering their options], that they are educated in what they should be thinking about, and have the tools to be able to shop around.
“It is something really meaningful employers can do for their staff.”
What is quantitative easing (QE)?
- QE is the Bank of England’s purchase of government bonds.
- This pushes government bond prices up and yields down.
- Annuity rates are determined by the yields on government bonds.