The government's £375bn programme of quantitative easing has hit the over-50s hardest and actually reduced growth, rather than boosting it, according to a report published by Saga today.
Research carried out on behalf of the organisation by the Centre for Economics and Business Research estimated that real incomes among the over-50s might have been 1.5% higher without the government's asset purchasing programme, better known as QE.
In particular, the age group has benefitted less than younger people from the effect that historically low interest rates have had on mortgage interest payments because these account for less of their total expenditure. These low interest rates have also affected their savings income, while the upward pressure on inflation caused by QE has further squeezed real incomes.
Dr Ros Altmann, Director General of Saga said: 'The Bank of England has scored an unexpected "own goal? with the effect of its policies on the over 50s.
'This age group represents more than half of UK households and contributes nearly half of all domestic consumption but the toxic combination of rock-bottom interest rates, spiralling inflation and QE money-printing has put a big squeeze on their incomes, forcing many to make cutbacks.
QE has also hit pensioners' income from annuities by reducing the yield on the government gilts that determine how much retirement income can be bought using their pension savings, the report said. It estimated that the annual income from a £100,000 annuity for a 65-year-old man has fallen nearly 20% in three years.
The policy has also taken 33% off the value of a £100,000 capped drawdown policy - when income is taken from a pension while it remains invested - for a 65-year-old man, it added. Many pensioners with drawdown plans have also been affected by Treasury rule changes limiting the maximum amount they can draw from their retirement pot.
These falls in real income have led to a decline in consumption by over-50s of as much as 5.8% in real terms between the start of 2008 and mid-2012, the report said. This drop, which equates to a 1.6 percentage point drag on gross domestic product, compared to a consumption decline of 3.9% for the average UK household over the same period.
Saga estimates GDP will be £24.7bn lower this year as a result of this drag, with the downward pressure on consumption that has resulted from the high inflation caused by QE alone equating to £7.7bn of this drop.
Altmann added: 'This change in spending habits has not just hit their living standards it has also sucked almost £25billion out of the economy, reduced the Treasury's tax take and may have inadvertently helped tip us into recession.'
Professor Douglas McWilliams, chief executive of CEBR, said the effect was particularly significant among pensioners who have had to take out an annuity in the past four years, who will be retiring on much lower incomes than they might otherwise have expected. Pensioners who rely on interest income will also have had their income reduced in the same way.
The conclusions of the CEBR research are in direct contrast to the findings of a Bank of England report published last month which said QE's impact on pension income had been broadly neutral and the policy had left most people in the UK better off.
Earlier today, the Bank of England announced that interest rates would remain at 0.5% this month and also held off any further bouts of QE.
In light of the report's finding, Saga called for 'more effective' policies to boost growth. These include the government encouraging pension funds to invest in infrastructure and lend directly to small businesses.
Temporary tax breaks on capital spending could encourage firms to bring forward investment plans, it said, while 'meaningful' incentives could encourage house-building.
Comments:
This is the very reason that for those who are around 10 years from retirement are recommended under a "Life-styling" approach to funding to be invested in government gilts. If invested in government gilts the funds required for pension purchase would rise in-line with any increase in pension purchase offsetting any additional cost. Those pensioners who have been hit by QE have chosen to follow a more risky investment path and are unfortunately facing the downside risks
Tom Lord, Actuary
