Pensions and interest rates
While mortgage holders will be wincing at the Bank of England’s decision to raise interest rates, millions of people with one eye on retirement have been waiting nearly a decade for this reversal in their fortunes.
Incomes from annuities – which provide retirees with a fixed income for life – have been on a downward trend since at least May 2011.
Seven years ago a £100,000 pension pot would have bought you an annual income of £5,943. Today that has fallen to £4,699.
This is because yields on government bonds, known as gilts, have plummeted during that time from 3.94pc to 1.66pc thanks to a combination of low interest rates and political uncertainty.
Annuity companies invest in gilts to get the returns they need to provide buyers with their retirement income.
Higher interest rates should see gilt yields rise – as has already been the case in anticipation of the Bank’s decision.
This rise should then be passed on to those buying an annuity through higher annual income offers.