Pension savers are being urged to prepare for “shifting interest rates” in 2025, which could affect their retirement, following the Bank of England’s announcement earlier today.
The central bank’s Monetary Policy Committee (MPC) voted to hold the base rate at 4.25 per cent in a move that is expected to bolster savings but raise the cost of borrowing for mortgage holders and people in debt.
Despite the Bank’s rate confirmation, those preparing for retirement are warning future cuts could impact their finances depending on the way in which they are saving money.
Notably, annuity rates are likely to be slashed if the base rate is reduced in the months ahead.
An annuity converts someone’s savings into an annual pension that provides them guaranteed income for life, or for a specified period. Retirees can tailor their annuity to their needs.
Beneficiaries can choose to get the same amount for the rest of their life or have it go up over time in line with inflation. Furthermore, protections can be added so that payments are protected dependents after death.
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Pension savers are being told to seek financial advice amid “shifting interest rates”
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However, annuities can be detrimentally impacted when inflation rises. A sizable regular annuity income paid today is likely to be worth a lot less in the future as the cost of living rises.
Furthermore, firms are more likely to cut annuity rates once the Bank of England slashes its base rate. This could mean pension savers are getting less from their guaranteed return in the years to come.
Following last month’s central bank rate announcement, which also saw rates held at 4.75 per cent, Hargreaves Lansdown gave the example of a 65-year-old with a £100,000 pension getting up to £7,345 per year.
The figure is based on a single life, annuity guaranteed for five years with individual living on an average postcode, paid monthly in advance and with no raise.
This comes in slightly under the £7,586 sum the same product would provide in October 2022, but marginally higher than the £7,217 handed out in July 2024.
Earlier today, the Bank of England voted to keep the base rate at 4.75 per cent
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Lily Megson, the policy director at My Pension Expert, noted that it comes as “no surprise” the base rate is being held at its current level considering the UK’s “economic landscape”.
She explained: “Inflation is proving sticky, and while the base rate is predicted to drop throughout 2025, the Bank of England will not rush these decisions.
“Savers, especially those nearing retirement, will need to look to the year ahead and factor in shifting interest rates as they pursue their financial goals.
“Taking advantage of higher interest rates in the short-term will likely be on some people’s agenda, while others will be considering longer-term options for building their pension pots.
Britons are worried about their retirement savings
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“Crucially, however, these are not decisions they should have to make alone.”
Megson urged Britons preparing for retirement to be aware of the changes to the economy and called on policymakers to ensure access to financial support.
“Consumers should not be left exposed to changing macroeconomic headwinds. Instead, the Government must step up to ensure people are supported in their financial planning by delivering better access to financial support, education, guidance and advice,” she added.
“In 2025, independent financial advice will remain essential for millions of people, but policymakers have a key role to play in encouraging the UK public to engage with their retirement plans, and ultimately empowering people to achieve their financial goals.”
