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What does the Bank of England’s latest interest rates decision mean for pension planners?

Yesterday, the Bank of England (BoE) announced that interest rates will be held at 0.1%.

This announcement will not have come as a surprise to many. With the UK only just beginning to reopen following a third national lockdown, the BoE will have been reluctant to rock the boat and scupper its post-COVID economic recovery.

Positively, the BoE’s cautious approach appears to be paying off. It is now estimated that UK GDP growth will reach 7.25% in 2021, up from 5% in February’s forecast.

That said, rates remaining as they are is unlikely to be celebrated. After all, base rates have been at historically low levels for over a year now. The continuation of such low rates will inevitably impact many people’s personal finances – most notably, their retirement savings.

So, what does today’s decision really mean for UK pension planners?

Keeping markets stable

Firstly, it is important to note that the BoE’s decision will have helped to keep UK markets stable. Of course, the primary concern will have been to facilitate the country’s economic recovery. However, this will positively impact pension investments as well.

As the economy stabilises, so too will pension investments. Consistency, even with base rates as they are, will restore market confidence. As such, people with pension investments will be relieved to see the value of their pensions gradually restore to pre-pandemic levels.

Bad news for annuities

That said, consistently low base rates are not good news for everyone. Indeed, people who were planning on purchasing an annuity in retirement will likely be forced to rethink their strategy.

This is because annuity rates, which are used to calculate how much will be paid to a retiree, are closely tied to interest rates – so the further they fall, the further annuity rates will be driven down as well.

Unfortunately, the fact that retirees are living longer won’t help annuity rates either. Life expectancy has been increasing for some years now, which essentially means that annuity providers have to pay retirees for longer. Consequently, longer life expectancies and negative interest rates create a perfect storm for rock bottom annuity rates.

So, those who had built their retirement strategy around the prospect of buying an annuity might now need to consider alternative options, as they are unlikely to receive an income as generous as they may have hoped.

Rethinking DB pension schemes

Additionally, people who were dependent on defined benefit (DB) pension schemes may also be concerned about base rates remaining at 0.1%. This is because low rates cause pension liabilities – the amount of money a company has to account for in order to make future pension payments to employees – to skyrocket.

Such high liabilities ultimately make DB pension schemes unaffordable for many companies. Consequently, some businesses may be forced to alter their pension schemes, most likely shifting towards the more sustainable defined contributions (DC) plans. This may not be an issue for younger employees, but adults approaching retirement age who were dependent on DB schemes may be concerned.

Don’t panic

Under such circumstances, savers may start to feel slightly panicked. This could ultimately lead to some wanting to make rash decisions about their retirement finances – and doing so could cause severe financial damage in the long term.

Instead, savers must remain calm and consult an independent financial adviser, who can explain what the current economic conditions will mean for their finances and how they can safeguard their retirement.

At My Pension Expert, for example, our team of qualified advisers take into account all aspects of a person’s financial circumstances, as well as their goals for retirement. This allows them to develop a sustainable retirement strategy, which will help clients to achieve a financially secure retirement.

These are unsettling times for savers. However, by remaining calm and seeking advice, Britons should be able to build a strong financial strategy and plan for the future with confidence.