Advisers have today (4 August) said the pension freedoms have helped save investors from even lower annuity rates following the Bank of England’s decision to cut interest rates to 0.25 per cent.
A package of stimulus measures, including more QE, designed to prevent the economy from falling victim to a Brexit-related slowdown has also been introduced.
Bob Wilson, independent financial adviser and director at Norwich based Greensky Wealth, said central bank rate cut will make accessing retirement savings via pension freedoms more attractive.
The freedoms give over-55s the right to access all of their cash, with 25 per cent tax free.
“Pension freedoms are a saving grace - people do not feel obliged to buy an annuity and they can hold off until the future when rates are better,” he said.
Richard Ross, director of Norfolk-based Chadwicks said the further reduction in interest rates and the likely follow through to still lower annuity rates would appear to vindicate the pensions freedoms legislation.
“What is more worrying is that people will continue to withdraw from their funds at rates that may have been appropriate ten years ago but in today’s low growth and rising inflation environment look increasingly unsustainable.
“Even an apparently modest rate of withdrawal of 4 per cent a year, increasing with inflation, would see 57 per cent of portfolios fail to make 30 years if rates as at 2014 persisted,” he said.
Andrew Tully, pensions technical director at Retirement Advantage said over the past week or so the industry has witnessed markets price in the expectation of a base rate fall, and therefore this news was expected.
“Well diversified portfolios will weather the storm better than those invested solely in UK equities, while clients looking to generate a retirement income should consider a blend of guaranteed income using an annuity and drawdown to retain flexibility while providing some certainty.”
Claire Trott, head of Pensions Technical, Talbot and Muir said self-invested personal pensions and small self-administered schemes would probably be the least impacted and those holding small amounts of direct cash will have been receiving little or no interest already.
“Those holding more cash will have negotiated higher rates by using fixed term deposits, which won’t immediately be impacted by this change, although the rates available on them in the future will probably reduce because of it.
Alan Chan, director at London-based IFS Wealth and pensions said the rate cut will have a mixed impact on pension clients.
For those in their thirties and forties who are accumulating, low interest rates will equal higher stock market valuations which will ultimately push the value of their pension pot up, leading to larger pot size.
However, for people retiring right now, in the 60-65 year old bracket, who are looking to secure a guaranteed income for life, reduced interest rates mean a reduced annuity rate and therefore a lower income.
The outlook is rosier for those who are already retired - the 65 plus bracket - who are already receiving the state pension, he said, state pensions as a rate cut, and the anticipated higher inflation, will mean higher state pension payments under the government’s triple lock guarantee.
ruth.gillbe@ft.com
