Negative interest rates could ‘spell disaster’ for pensions – BoE decision due tomorrow

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Pension assets can be impacted by interest changes, both negatively and positively. Interest rates generally move according to what the Bank of England does with the base rate.

Currently, the base rate is set at 0.1 percent, the lowest it has ever been.

It has been set so low for a number of reasons, with the most pressing being the economic impact of coronavirus.

Tomorrow, the Bank of England will be announcing their plans for the base rate going forward and with it already being so low and coronavirus still being an issue, there is a chance that the central bank will be forced to move it into negative territory.

This would have a profound impact on retail banks and other financial institutions who would have little choice but to alter their savings and mortgage products.

Private pension holders will also see their assets alter and Andrew Megson, the executive chairman of My Pension Expert, weighed in on what could happen: “Negative interest rates will cause consumers many headaches – especially when it comes to pensions.

“Final salary contributions will become extinct, as companies will simply be unable to afford them.

“This would be because the pension liabilities – the amount of money a company has to account for in order to make future pension payments to employees – would skyrocket.

“It’s likely that we’ll see most pension schemes take on a defined contribution model.”

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Final salary schemes are relatively rare in the modern workplace and as such, the damage could be fairly limited.

However, those close to retirement with defined contribution pots could see their potential income plummet, as Andrew continued: “It could also spell disaster for annuities – a retirement finance product purchased with a pension pot and offers income for life (or a fixed period of time depending on that is agreed with the lender).

“Annuity rates, which are used to calculate how much will be paid to the retiree, are impacted by both interest rates and life expectancy.

“So, with people living longer and rock-bottom interest rates, those without a guaranteed annuity rate could see their value plummet.

“What’s more, those with savings accounts will suffer.

“Years of stashing away their cash will backfire as their money loses value.

“This could drive consumers to move their money to riskier investments in a bid to increase its value. They could end up losing money as a result.”

This all sounds scary but fortunately, consumers can still take action to ease their anxieties.

Andrew concluded by highlighting that savers should seek out advice where they can: “So, where does this leave consumers?

“The important thing is not to panic. Seeking independent financial advice will be key to forming a sustainable retirement plan.

“They will be able to access consumers’ financial circumstances and help you to find the very best retirement option to suit their needs.

“This way, consumers will feel more in control of their financial future and allow them to look forward to retirement.”

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