Matthew Brown, Private Client Partner at Thomas Miller Investment, comments on how the interest rate cut will affect pension savers saying that pension savers need to reconsider their drawdown versus their annuity choices.
“Last week’s interest rate cut and associated measures is another hammer blow for those trying to live off cash savings. The cut in rates and cheap Bank of England finance for the banks means that savers are set for low interest for the foreseeable future. For many this will result in a strategy of eating away at capital year-on-year to make ends meet.
“It is probably too late for this group to adopt any other sensible strategy, as investing while taking a high income is a recipe for disaster, but what about those savers approaching retirement who still have options and choices, what does the latest cut mean for them?
“People who will be retiring in the next ten years will need to start making decisions regarding whether to buy an annuity with their pension fund or to adopt a strategy of drawdown. The latest rate cuts, along with the high price of gilts, is making annuity purchase a very expensive option. While still the right course for many people, especially those with medical or lifestyle factors that can enhance rates, for others drawdown will start to look more and more appealing.
“For retirees planning on using drawdown, a well-balanced investment approach, combining high-quality international and domestic equities, fixed interest bonds and potentially an element of commercial property, is likely to yield far better outcome than cash in the long run. They key factor, however, is deciding how much income can to be drawn from the portfolio to ensure it is sustainable.
“In a low inflation, low interest rate world returns will be subdued and prudence will be the watchword when considering the right strategy. However, over the long term that is retirement, a well-diversified portfolio should beat the low returns we are seeing on cash deposits.
“Expert financial planning, with the support of a professional investment manager, provides the greatest opportunity for success amongst those approaching and in retirement. We would always recommend that those who need advice should speak to a financial adviser.”