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What the Bank of England rate rise means for pensions

Pension-Pensions-savings-retirement-piggy bankToday’s historic Bank of England rate increase will give pensions a “modest boost” but heralds a warning for those planning to transfer out of their final salary pension.

The bank today announced an increase in interest rates from 0.25 per cent to 0.5 per cent; the first rise in a decade.

While many pointed to obvious benefits for savers, industry experts noted that pension funds would also see conditions improve.

However, further increases will be needed to make a real difference to pension funds.

Hymans Robertson chief investment officer Andy Green says: “This move by the Bank of England today may not be the silver lining for pension funds that some predict, as nominal gilt yields and the real yield on index-linked gilts are little changed from their levels at the beginning of the year.”

Green adds: “In this ongoing environment of low yields and uncertainty we continue to recommend a focus on assets that can deliver predictable returns with attractive levels of income to deal with pension fund outflows.”

Royal London policy director Steve Webb says the increase will give a “modest boost” to pensions.

Webb says: “If today marks a turning point in interest rates this should signal a gradual recovery in annuity rates and could help to reduce deficits in company pension schemes.”

However, he adds: “Assuming that the Bank of England sticks to its plan for ‘gradual and limited’ increases, this announcement is unlikely to radically transform the pensions landscape as rates remain at historically low levels.”

Webb says pension savers considering transferring out of a defined benefit scheme might be concerned by today’s news as transfer values will likely fall after today’s announcement.

However, ES Paraplanning director Eddie Sammon says transfer values may track in the opposite direction on the back of the Bank of England dampening the long-term prospects for rate increases.

He says: “Usually with an interest-rate rise we would expect annuities to become cheaper and defined benefit pension transfer values to fall as the price of securing ‘risk-free’ income reduces.”

Sammon adds: “However, the Bank of England has also dampened the long-term prospects for rate rises, which is why we may see some small changes in the other direction. If expectations for rate rises increase in the future then this may also help the funding positions of defined benefit company pension schemes.”

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