Pension: Negative interest rates 'an unsettling prospect' for retirees – BoE review looms


Pension assets can be impacted by interest rate changes, which in turn are directly impacted by what the Bank of England decides. Currently, the central bank has the base rate 0.1 percent and the bank’s next decision on it will occur on May 6.

Ahead of the next base rate decision, Andrew Megson, the executive chairman of My Pension Expert, reflected on what may be on the horizon for pensioners: “It seems unlikely that we will see any major changes to interest rates. The economy is only just beginning to reopen, following the UK’s third national lockdown.

“As such, the Bank of England will be keen not to rock the boat too soon and hinder the country’s post-Covid recovery.

“A stable market will certainly benefit pension investments. It will instil market confidence and enable investments to stabilise and return to pre-pandemic levels.

“Of course, such an event would allow savers some respite from Covid-driven financial anxiety.

READ MORE: Pension: Retirees can be £120,000 ‘better off’ in retirement – how?

“Advisers will take into account the entirety of a saver’s circumstances and help them to develop a tailored retirement strategy to suit their specific needs. Thus, savers will be able to form a sustainable retirement plan, and even prepare their strategy if interest rates decline further.”

While Andrew expected there to be no change to the base rate, many fear the Bank of England will soon have no choice but to introduce negative rates.

This would have dramatic impacts on savings and mortgages but many may not realise that it could also impact pensions, as Andrew explained: “Negative interest rates will be an unsettling prospect for many pension planners.

“They will deal yet another blow to those planning on purchasing an annuity – a retirement finance product purchased with a pension pot which offers income for life (or a predetermined period of time). Annuity rates, which are used to calculate how much will be paid to a retiree, are closely tied to interest rates. As such, they have been low for quite some time now.

However, if base rates fall below zero, annuity rates will plummet even further.

“Adding to the pressure on annuity rates is the UK’s growing life expectancy. The longer a person lives, the longer an annuity provider will need to pay them an income. As such, negative interest rates, teamed with longer life expectancies create a perfect storm for rock bottom annuity rates.

“Negative base rates will also unnerve those who are dependent on a defined benefit (DB) pension scheme.

“This is because low-interest rates cause pension liabilities – the amount of money a company has to account for in order to make future pension payments to employees – increase dramatically.”

Andrew concluded: “Such high liabilities have ultimately made DB pension schemes unaffordable for many companies.”Consequently, some businesses may be forced to alter their pension schemes, most likely shifting towards more sustainable defined contributions (DC) plans.

“This may not be an issue for younger employees, but those nearing retirement age who are dependent on DB schemes may be concerned.

“That said, savers must not succumb to pension panic. Instead, I would implore individuals to review their existing retirement strategy, evaluate their various options and, most importantly, seek independent financial advice.

“Advisers can assess every element of a client’s financial situation and help them to understand the various options that will best suit their needs. Doing so will certainly help savers to get their finances back on track and achieve the financially secure retirement they deserve.”

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