More Bad News for UK Pensions

Following the Bank of England’s historic decision to cut interest rates to 0.25%, as a result of the EU referendum result, gilt yields have plummeted to historic lows, with interest rates on some government bonds turning negative1 and this has left already struggling UK pensions reeling from the fallout.

The effect on Defined Contribution Pensions

If you are in a UK Defined Contribution pension you will suffer from lower income from your pension with annuity rates falling by 10%1 over the past year, cutting the income for a pension fund of £200,000 by £1,0481.

If that wasn’t bad enough, the pound has fallen by over 20% against SGD2 over the last year, further reducing the spending power of expats intending to retire overseas.

For Final Salary Schemes the picture is, if anything, worse.

The interest rate cut hits pension funds, as gilt yields are a major component in valuing the future liabilities of a scheme. Each time yields fall, the gap between assets and liabilities grows, throwing many schemes into deficit.

Figures from the Pension Protection Fund revealed that the collective deficit of nearly 6,000 of the UK’s biggest company pension schemes had widened by more than £24bn in a month to reach a new high of £408bn3.

The latest rise in the deficit of schemes covered by the pensions lifeboat points to the difficulty in tackling troubled schemes including BHS, where former owner Sir Philip Green is battling to “sort” the problem, and Tata Steel, where a pensions restructuring could be key to a rescue bid.

The latest deficit estimate comes after a 31% rise announced last month in the wake of the Brexit vote but before this month’s decision by the Bank of England to cut interest rates to 0.25% and start pumping money into the economy.

What should you do?

You should review your UK Pensions urgently to see how you are affected and find out what actions you can take to safeguard your retirement plans.

Contact your AAM Financial Planner or email  [email protected] now and get a professional analysis of your pension options from a Chartered Financial Planner.

Ian Black
Head of Wealth Solutions
AAM Advisory Pte Ltd

Sources:

  1. www.thisismoney.co.uk/money/pensions/article-3666110/Annuity-rates-slashed-8-gilt-yields-crash-Brexit-vote.html
  2. www.xe.com
  3. www.pensionprotectionfund.org.uk

Disclaimer:

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