What does the Bank of England bond buying mean for your pension? | The Sun

THE Bank of England dramatically stepped in yesterday to avoid pension funds collapsing.

It will buy government bonds, preventing a Northern Rock-style run on the firms.

It follows fallout from the government's mini budget last week when it announced a raft of tax cuts – but no details on how it would fund them.

The pound plunged to a record low and financial markets were thrown into turmoil.

Today, defiant Liz Truss insisted 'we had to take urgent action', insisting last week's Mini Budget was not directly to blame.

Anyone with a private pension is not directly affected by the Bank of England’s bond buying today.

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But it has stepped in to ensure that the way pension cash is collectively invested remains stable – and isn’t affected by dramatic movements in the markets after the pound plunged.

Workers who save into a private pension should continue to save into them as normal. 

How is my pension affected?

As pension savings are a long term investment there is time to ride out any market falls, as they bounce back in time – for example, from the global financial crisis and the Covid pandemic.

Funds invested in the UK stock market will have fallen in value. But when sterling is weak, the value of overseas investments when converted back into sterling will receive a boost.

So it depends how your pension is invested, and is why it pays to diversify your investments.

Some types of pension – known as defined benefit (DB) or final salary – are more invested in gilts (government bonds), and so are more exposed to falling gilt prices.

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The Bank of England’s (BoE) bond buying is aimed at stopping them falling too far.

Helen Morrissey, pensions expert at Hargreaves Lansdown said: “The BoE’s announcement should calm the markets after a tumultuous few days that have caused chaos with news of some final salary schemes having to sell assets at short notice.

“This should settle down but final salary scheme trustees have been urged to keep the resilience of their investment strategies under close review.” 

The pension regulator welcomed the Bank of England’s action and has told those running the pension schemes to make sure they are prepared to handle dramatic market movements.

Around 17.5million people haveDB pension, with more than half of those in the public sector.

This includes teachers, nurses, local government workers and those in the police, armed forces and firefighters.

This type of pension pays out an income in retirement based on your salary when finishing work.

Why did the bank of England step in?

Pension funds owned around £1trillion of gilts.

But they were facing a run on funds because the prices of long-term gilts had halved in four days.

Fears around the health of the economy had caused the biggest sell-off of long-term government debt since the 1990s recession.

The chaos below the surface of the economy was similar to that seen with Northern Rock in the early days of the 2007/8 financial crisis.

The fear was the pension funds’ forced sell-off of gilts would result in a downward spiral of the market.

Steve Cameron of Aegon said:  “The Bank of England is seeking to avoid gilt yields rising further.

"This happens if the demand for gilts compared to the supply falls, meaning their prices fall and their yields rise.

"The Bank may buy gilts to keep the price from falling further and hence the yield rising further.

“Some defined benefit pension schemes have been selling gilts, increasing the supply. This won’t directly affect the pensions of members of these schemes.”

One perk of higher gilt prices is for anyone nearing retirement and planning to buy an annuity.

Steve Webb, former pensions minister and partner at financial firm Lane, Clark Peacock said: “The one glimmer of hope at the moment is that for people thinking of converting their pension pot into an income for life by buying an annuity, current annuity rates are some of the best we have seen for a decade.”

An annuity is one way to get a regular income, and you use money from your pension pot to buy one – it pays you a guaranteed income for life.

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Those close to retiring and planning to buy an annuity now could find better rates as they are closely tied to gilt yields, which have shot up.

Better annuity rates mean a higher income.

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