The Bank of England’s decision to cut interest rates means now is probably the “worst time ever” to make a retirement income decision and people looking to buy an annuity should consider deferring, according to Aegon.
The Bank today cut interest rates to 0.25%, the first move it has made since cutting them in March 2009. It also boosted QE and its bond purchasing programme.
It is likely the move will further hit annuity rates which are already at record lows.
Aegon pensions director Steven Cameron (pictured) said today’s announcement means “now is probably the worst time ever to be making a retirement decision”.
He warned people looking to buy an annuity now would face the prospect of locking in super-low returns for life.
He added: “After seven years of low rates, there’s no guarantee we’ll see any significant improvement in interest rates or annuity terms in the short term.
“But those not ready to make a ‘once in a lifetime’ decision could consider deferring their retirement date or alternatively keeping their pension fund invested and drawing a retirement income direct from their fund.
“Advisers can recommend tailored investment strategies to reduce risk, potentially including elements of guarantee.”
Association of British Insurers director of policy for long-term savings and protection Yvonne Braun said today’s decision, which had been widely predicted, was “disappointing news” for annuity buyers.
She explained: “While we recognise there are wider economic judgements underlying this decision, continued low interest rates and sustained quantitative easing are the main factors keeping annuity rates low.
“This further drop of the interest rate to unprecedented low levels and the additional injection of quantitative easing are likely to put downward pressure on annuity rates.”
Still right choice for some
Intelligent Pensions head of pathways Andrew Pennie agreed the announcement would have a negative impact on annuity rates.
“Annuity rates are already at record lows having fallen 12% since the start of the year – one wonders how much further they can actually fall.
“It’s no surprise that many are choosing not to buy an annuity under the new pension freedoms in the hope that future rates might improve or a belief better returns can be generated elsewhere.
“But for some people annuities are the right retirement solution and there is no advantage in deferring for several months – or years – in the hope that rates rise again,” he said.
Pennie added: “The cut in interest rates typically makes stocks and shares more attractive and people with pensions exposed to the markets could see a jump in the value of their pension savings.
“The cut and likely fall in gilt yields may also benefit those people looking to transfer their defined benefit pensions to take advantage of the new pension freedoms. The cost of securing future income will now be more expensive and hence transfer values should rise to reflect this.”
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