Cut in base rate makes for increased need for advice

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The Bank of England made a further cut to interest rates on 4 August. This, alongside other ‘monetary policy’ measures are designed to help strengthen the UK economy as we prepare to leave the European Union. We face some uncertain times ahead, so anything that aims to create a stronger economy is good news for investors, including those saving in defined contribution schemes such as personal pensions. Younger savers can think long term and the best way to build up an adequate retirement income is to start saving early, to contribute regular amounts and to make the most of any employer contributions.

Those about to make a decision regarding turning their pension pot into a retirement income face particular challenges at the moment. Historically, most pension savers exchanged their pension fund for an ‘annuity’ at retirement, which guaranteed them a fixed income for life. Unfortunately, if you buy an annuity when interest rates are low, you lock into a lower income for the rest of your life. The most recent cut in interest rates mean that annuities bought in the current economic climate offer even lower incomes.

We've now had seven years of low interest rates. While some people predict that in the process of leaving the EU, interest rates may begin to increase again, there’s no guarantee we’ll see any significant improvement in interest or annuity rates. At least in the short term.

This makes it particularly difficult for those who are planning to retire in the immediate future and who face a ‘once in a lifetime’ decision. While not an option for everyone, one possible way forward is to defer retirement, continue to work and put off turning your pension pot into a retirement income.

Another choice may be to opt for ‘flexible access drawdown’, which means that savers can keep their pension funds invested, but start to draw a retirement income directly from a fund. The amount taken can be varied to suit circumstances, while the option of buying an annuity at a future date remains. If one was to opt for drawdown, it is important to remember that the more money that is taken out, the greater the risk is of running out of funds later in life. Seeking advice can help you arrive at the right investment strategy for you and some providers can offer built-in guarantees.

Pension savers now have more choice than ever before. While this is good news, it also makes decisions more complex. Anyone that doesn’t feel confident in making retirement decisions can seek support from a range of places. Professional advisers can make recommendations tailored to the individual, and pension providers can offer information and varying degrees of support. In addition, the Government has also made available the free Pension Wise service which offers guidance on retirement options.

While we don’t quite know what the future holds, it is important to remain engaged in our retirement savings and consider the various possibilities. 

By Steven Cameron 

Steven Cameron