Pensions savings left teetering on a cliff edge by Bank's money-printing bond bubble

The life savings of older workers have been left teetering on a cliff edge because of the Bank of England’s attempts to jump-start the economy.



As much as £30,000 could be wiped off a £100,000 pension pot because savers have been exposed to a giant bubble in investment markets, experts have warned.



They’ve experienced an artificial boost in the value of their retirement funds caused by the Bank of England’s policy of printing more money, known as Quantitative Easing (QE).



Bond prices have been soaring because the Bank has been buying them in huge volumes.



But after a halt was called to QE last week, the bubble may be about to burst — causing bond prices to plummet.



The situation is so desperate it has been compared to the Dotcom crash of the late Nineties, in which millions of investors lost money in over-priced technology shares.



And it will heap further misery on savers who are facing pension pay-out rates that have sunk by a fifth in three years.



‘No one knows exactly when or if this crash will strike, but the value of millions of pension pots could easily plunge by as much as 30 per cent,’ says Alan Morahan, of consultants Punter Southall.



Since it began in March 2009, QE has pushed the price of bonds called gilts — which are essentially IOUs issued by the Government — to an artificial high. At the same time, the interest rates paid by these bonds have plummeted.



Until now the main side-effect of QE has been that it has caused pay-outs on pensions, which are based on the interest that bonds pay, to fall to a record low.

However, the Bank has argued that this has been offset by the corresponding rise in the price of bonds — which has boosted the value of many pension funds.



If the bank were to end QE for good, it would have to sell off bonds. This would cause their value, and that of the funds invested in them, to fall sharply.



This could mean disaster for anyone in a stock market-linked company pension who hopes to retire in the next decade.



These schemes typically try to protect the money that savers have built up over the years by moving investments out of supposedly riskier stocks and shares and into bonds.



The strategy is known as ‘life- styling’ and happens automatically for those approaching retirement. But it has meant that many older workers have unwittingly bought in right at the top of the bond market bubble.



To compound matters, if fund prices were to come crashing back to earth there is no sign that there will be any corresponding rise in pension pay-out rates.



‘Bond prices have risen to unprecedented levels — it’s a real bubble,’ says Ross Leckie, director of fund management firm Artemis. ‘The tragedy of QE is that it supports borrowers but just thumps savers time and again.’



Analysis from wealth manager Hargreaves Lansdown shows a nest egg worth £100,000 when QE began in March 2009 is worth £150,913 today. The Bank admits QE has wiped £1,630 a year off the annual income from that pot.



Get a move on: Pensions expert Laith Khalaf advises people less than three years away from retirement to move their bond funds into cash as soon as possible.

However, it also argues that the bond market bubble that has caused pension fund values to soar effectively offset the fall in pay-out rates by £1,620 — leaving savers just £10 a year worse off.



However, experts believe fund prices could crash at the merest nudge — particularly if the Bank of England sells back its bonds to banks as it must do at some point.



Once this starts, it has the potential to wipe out savers’ gains in a matter of months, says Mr Morahan.



An estimated half-a-million people are at immediate risk if the bubble bursts, having bought into bond funds.



Thousands more will have their pension moved into these investments over the coming months — just as their price edges closer towards disaster.



The Bank of England argues that annuity rates should rise to compensate.



But pension experts say this is unlikely to happen. A combination of rising life expectancy and European red tape is likely to keep annuity rates low.



‘There is no way annuity rates will rise as much as bond funds fall,’ says Billy Burrows, director of independent annuity advisers Better Retirement.



‘There are a huge number of other factors that will hold them back. Savers stand to suffer a loss, whatever happens.’



Laith Khalaf, a pensions expert at Hargreaves Lansdown, says savers who are less than three years from retirement can protect themselves by moving their money into cash now. Though the returns are poor — often around 0.5 per cent a year in a pension — it guarantees your gains.



Anyone more than three years from retirement could consider a cautious managed fund as an alternative.



Mr Khalaf says: ‘By the time it becomes apparent that the bubble has been pricked, it may be too late.’



Jason Witcombe, an independent financial adviser at Evolve, says: ‘The key is to protect what you have got. Talk to your pension provider about your investment choices — your best option may be to go into cash because even some of the low-risk funds may be exposed to the bond bubble.’



The Bank of England acknowledges there could be ‘disruption’ after QE ends, but says that it will work to soften the blow.

HOW TO TELL IF YOUR NEST EGG IS IN DANGER

AM I AT RISK?

Your pension is under threat if it is invested in bonds. This is most likely to be anyone nearing retirement who has a stock market-linked company pension, also known as defined contribution.

Here, a portion of your salary goes into a fund that invests in shares, company bonds and government gilts. So, if the value of these bonds suddenly falls, then so will the value of your pension. Final salary pensions, and those based on average earnings, are not affected.

HOW DO I KNOW WHAT PENSION I’M IN?

Check your latest statement — you should get at least one a year. It will show where your money is invested. If you can’t find one, call the provider that runs your company’s pension scheme. Your HR department will be able to help with this. Take the fund information to an independent financial adviser if you have trouble deciphering it. CAN I TELL IF I’M INVESTED IN BONDS? All pensions are set towards a certain retirement date — typically 65, but can vary. The majority of stock market-linked company pensions are life-styled. This means your pension will be moved automatically out of shares and into bonds as you near retirement. The switch usually starts ten or five years from your retirement date. Therefore, the closer you are to retirement, the more likely your money will be invested in bonds. WHAT SHOULD I DO? Check what fund choices are on offer. Your pension provider will have a list. If your retirement date is less than three years away, advisers say you should consider moving your money out of bond funds now. The safest alternative will be a ‘cash’ fund. This is similar to a savings account at a High Street bank. The returns will be tiny — around 0.5 per cent a year or less — but it will protect your life savings from any volatility in the investment markets.If you are more than three years from the date of your retirement, advisers say you could move some of the pot into cash and a small portion into the most cautious fund choice.



