What is QE3? - What is Quantitative Easing And How Will It Effect You And Me?



The use of Quantitative Easing from the Bank of England may lead to a 60 basis point lowering of gilt yields followed by annuity rates decreasing by 6% during 2012 and can mean less income for retiring pensioners that must purchase an annuity now.

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The decrease of annuity rates due to Quantitative Easing could be as well as the 11% decrease already experienced by pensioners since June 2011 because of the Eurozone crisis where investments are already gone to live in safe havens including UK government bonds or gilts.



Gilt yields fall when demand for gilts increases and as prices increase it reduces the yield which suggests the return on those assets falls. Annuity providers use 15-year gilts to secure the income for pensioners and as a broad rule a 60 basis point lowering of gilt yields will result in a 6% decline in annuity rates, however, there can be a time lag before the changes are implemented through the providers.

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Quantitative Easing (QE) has been available since March 2009 and had the effect of reducing annuity rates by 6% during that year. QE was initiated because of the economic crisis requiring the lender of England to inject money straight into the economy plus they are doing this now to meet the Monetary Policy Committee inflation target of 2%. One other approach to accomplish that target is as simple as setting the financial institution Rate which is very low at 0.5% and for that reason Quantitative Easing will be the sole method to meet the inflation target.



At the conclusion of 2011 inflation, like the Market price Index (RPI) fell from 4.8% to 4.2% and if this will continue to fall at 0.6% per month chances are it will fall beneath the inflation target of 2%. Therefore the Bank of England is intending to inject £75 billion from February 2012 onwards and possibly approximately £100 billion more during the year if neccessary.



The lender of England intends to use Quantitative Easing to stimulate consumer spending and company investment. By purchasing government bonds or gilts the overall effect is to reduce the yield so encourage investors to modify from bonds or gilts with other financial assets including company bonds which in turn will lessen the yield on these assets. This ultimately is expected to reduce the expense of borrowing for the consumer and business and encourage spending because of the extra cash throughout the market which supports to improve inflation to meet the 2% target.



Quantitative Easing even offers consequences for defined benefit or final salary schemes supplied by employers as gilts are used to determine the future funding provisions for these schemes. Since the yields decrease a business could find the last salary scheme deficit increases and so the company will at some stage need provide extra funds for the pension scheme as opposed to with such funds for other investments for example employing new people.



The bank of England is utilizing QE to profit the wider economy however the side effect is going to be decreasing annuity rates for pensioners which can be already struggling with 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 should they have medical conditions which could add 20% to 60% for the annuity-rates by purchasing an impaired health annuity.

 

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