The ‘interesting’ times we are currently witnessing do cast a shadow over the best uk annuity rates, and for borrowers and savers. The Governor of the Bank of England predicted just last week that economic recovery, although some might say in sight, could be slow and pretty protracted, indicating that interest rates would remain low for at least the coming twelve months, and probably beyond.
If he is right then it is likely that this will have a protracted effect on annuity rates, keeping them down. Andrew Pipe, an economist with the Lloyds Banking Group, believes the Governor is likely to be right and that interest rates will remain at today’s low levels for two to three years. He’s not saying that they won’t rise at all, but they will climb very, very, slowly. Not good news for all the retirees out there. The Nationwide’s chief economist Martin Gahbauer largely agrees with these views, stating that base rates will stay at 0.5% for the next twelve months but start rising slowly in the second half of next year.
Savers’ hearts, and those of many retirees, will have sunk at the news that base rates will remain low for some time yet, producing returns on many accounts to laughable fractions of 1% that won’t even pay the bus fare to make such a deposit worthwhile. MInd you, pensioners receive free bus travel, don’t they? It isn’t all doom and gloom, though, banks need to attract money to lend, so many are offering much better returns.
Low interest rates are more bad news for annuities, pushing down gilt yields, on which pension annuity rates are based. The return from these gilts are directly linked to interest rates, so when these are low, companies have to pay more to guarantee the annuities they promise to retirees. This pushes up the cost of final salary schemes (DB) run by companies, making them even more expensive to operate, and increasing the likelihood of schemes closing down, as we have witnessed recently.