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The trouble with QE

The theory behind quantitative easing, is that it helps growth by buying government bonds and lowering interest rates. This is achieved by gilt sellers depositing money in banks to increase lending, which should boost the economy. Gilt yields fall, which should lower interest rates across the economy, helping borrowers, and stimulating corporate lending. But some say sellers of gilts often buy overseas assets, so the money does not boost the UK economy and banks are not lending on terms that are attractive to small companies so the new money is stuck in bank balance sheets.

This helps banks become stronger, but consumers get weaker. Low gilt yields do not actually result in better availability or value for small company loans. And institutions which need to hold gilts, such as pension and insurance companies, must pay more to buy their gilts, which diverts money away from other assets.  For older people this policy represents a significant transfer of wealth from people who have saved for their retirement, towards younger borrowers and banks.

Buying gilts reduces annuity rates. With record numbers of people reaching age 65 this year, there will be more annuity purchases, as the majority of people with personal pensions buy annuities, to provide a pension income for life, on retirement. Anyone retiring now will receive a permanently lower pension due to falling annuity rates as a result of QE.

It is always best to seek advice on buying an annuity, Enable Independent Financial Advisors in Bishop’s Stortford are happy to take your through your options.

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