Drop in UK interest rates makes new pension flexibilities more attractive
10 August, 2016
On 4 August 2016 the Bank of England announced the highly anticipated cut to the UK bank base rate from 0.5% to the record low 0.25%. This was the first such drop in over seven years and is part of a package of measures introduced to help soften a UK economic slowdown as a result of Brexit.
UK annuity rates have been at historic lows for over seven years as a result of a number of factors including quantitative easing and people simply living longer. The recent cut in UK interest rates will likely result in even lower annuity rates, making it quite possibly the worst time to retire for those whose only option under their existing UK pension plans is an annuity purchase. By purchasing an annuity now, people will be locking themselves into low levels of income for life.
The likely drop in UK annuity rates will make the new UK pension flexibilities introduced in April 2015 look ever more attractive to retirees. For retirees who have UK pension plans that embrace all of the flexible options provided under the new UK pension freedoms, they can opt to simply draw an income direct from their pension funds while keeping their pensions invested. People are no longer obliged to purchase annuities and can hold off, if desired, until annuity rates improve.
It is more important than ever for those at or near retirement to understand the options available to them under their current UK pension plans and determine whether these options meet their retirement objectives. It should not be assumed that all UK pension providers offer the same retirement options or, indeed, have fully embraced the new UK pension freedoms.
Picture by Michael Pedersen at flickr.com