What does the interest rate change mean for your pension

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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material are correct as of the publication date, but since publishing the information could be out-of-date by the time you read the article. For our latest information and news, please see our articles section here.

How did you react to the news?

Depending on whether you’re trying to save money or repay it, the Bank of England’s decision to cut the base rate could be seen as good or bad.

For many people, it’s likely to be a mixture of both.

If you’ve seen a fall in your mortgage repayments or have taken out a loan at a rate that seems impossibly low, then you’ll probably be upbeat.

If you’re trying to get a return on cash savings, or nurture a nest egg, you probably won’t be quite so happy.

And if retirement is on the horizon, you may be concerned that your pension will be affected by the rate change.

In this post, we look at the decision, what its impact could mean for your pension, and the options you have to protect your financial future.

What’s happened?

At the start of August, the Bank of England cut the base rate. Already at an historic low of 0.5%, it is now just 0.25% – and could be cut even further.

What is the base rate?

It’s the interest rate that the Bank of England sets for lending to other banks. It also influences other interest rates – that’s why loans and mortgages are so cheap, and why savings accounts are offering low returns.

What does the decision mean?

Mainly, the announcement shows that we will continue to live in a low interest rate environment for a long time yet.

Beyond that, the impact of the decision really depends on what you are doing with your money.

If you’re a borrower, you may see it as great news. Your mortgage payments could be at their lowest they will ever be, so it’s an incredible opportunity to pay that debt down much quicker. Of course, there’s also the temptation to borrow more money because it’s so cheap right now – but that’s rarely a good idea. This is a golden opportunity to clear existing debts, which will also save you more in the long run as you won’t be paying interest for as long.

If you’re a saver, you may see the news as terrible. It’s already difficult to find a good return on cash, even in ISAs, and it’s likely to get even harder now.

What does it mean for my pension? 

Question MarkThere are a few ways that an interest rate change can affect pensions and retirement, depending on whether you are looking to retire soon or continue saving for a number of years.

The biggest impact could be for people who are hoping to retire soon and purchase an annuity. This is because a lower base rate is likely to have a knock-on effect and reduce annuity rates, which means they will offer a lower income.

Of course, annuities aren’t the only option – thanks to the pension freedoms, you can take as much or as little money directly from your pension once you are 55 years old.

If you are not retiring for a while, then any potential impact depends on the type of pension you have – but don’t worry, you can still take measures to protect yourself.

An annuity isn’t your only option for a guaranteed income.

If you are in a defined contribution pension

With a defined contribution scheme, the money you pay in (your employer may contribute as well) is invested across a range of investment types, including the stock markets. You withdraw money from it directly (from the age of 55, of course) or you can use it to buy a guaranteed income for life.

As investments can rise and fall, the value of the pension fund can also fluctuate. It’s impossible to say with any certainty what a change in the base rate will do to a defined contribution pension, though, particularly because they usually spread the money across different types of investments. It’s likely that a lot of your pension is in the stock markets, though.

If you are in a defined benefit scheme

With a defined benefit scheme (often referred to as a ‘final salary’), you don’t own the fund. Instead, your employer promises you an income from when you retire for the rest of your life. You don’t need to worry about the returns on the investments because you are promised a set income instead.

However, you may have seen in the news that some final salary schemes are struggling to make the payments they have promised. This is because of a gap (or ‘deficit’) between what the companies have promised and what they can afford.

A lower base rate could make this gap bigger, putting more final salary schemes at risk. This is because, as the FT explained, “low interest rates push up the value of their liabilities”. On the other hand, low interest rates mean that if you wanted to transfer out of a final salary scheme, your transfer value would probably be higher.

You can protect yourself from the turbulence

AeroplaneHaving spent years working and saving to have a comfortable future, the big question is “What should I do now to protect my money?”

We get it: the last thing you want is to have the rug pulled from under you as you approach retirement. And you may be worried that’s what could happen.

The reality is no one knows what the future holds. It’s possible that your pension would be lower than you had hoped for or expected – and it’s also possible that it won’t.

If you want more certainty than that, there’s another option that you may be interested in.

It offers flexibility and security – putting you in control.

And it means you don’t need to worry about stock markets or final salary deficits. The income you receive in the future can be secured today, even if you aren’t retiring for years.

Sounds great! How does it work?

Some providers now allow you to protect your future income.

This means that you won’t have any nasty surprises and it gives you the ability to make more concrete plans, as you will know exactly how much income your pension will pay you when you retire – for the rest of your life.*

You would receive a guaranteed minimum income, which you can stop and start whenever you like. It could even increase if you defer taking it for a while.

There’s a lot more on offer, too.

If you’d like to know more about protecting your future income, including whether it’s a good choice for you, just hit the ‘call me back’ button below and one of our friendly team will call you to answer any questions you may have. If you decide to make the change, we’ll take care of everything for you.

You can get our full advice with no obligation to pay us or act on the recommendation – so what have you got to lose?

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Important information

*The plan provides the opportunity to take lump sums and/or adjust the level of income you take, which could affect the guarantees on offer

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new

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