What does the interest rate cut mean for pension savers?

While homeowners with variable rate mortgages have been rejoicing at the recent cut to the Bank of England base rates, those coming up to retirement have been faced with a difficult decision.

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For pension savers hoping to turn their pensions into an income for life by purchasing annuity, the deals on offer have gone from bad to worse.

Many of the top providers have cut their annuity payouts meaning that for a married couple a £100,000 pension pot would buy an inflation proofed income of just £2,256 a year.

A decade ago, a 65-year-old with a £100,000 pot could get £7,092 a year from an annuity, though without any link to inflation.

So what are the options? For some, the best option might be to take all of their pension as cash. For others, you can always take 25% of your pension as a tax free lump sum and then leave the rest invested until annuity rates improve or alternatively you could explore income drawdown options.

Drawdown allows savers to invest their pension fund into one or more funds that allow them to take an income at times to suit them. Most people use drawdown to take a regular income which may be adjusted periodically depending on the performance of your investments and your changing needs.

But, what does the base rate cut mean for your pension if you are some way off retirement? The short answer is not a great deal.

Workplace pension saving remains one of the most tax efficient ways for most people to save and with returns from cash savings at an all-time low, using a pension fund to invest in other assets that have a greater opportunity to grow over the long term is well worth considering.

In fact, over the last three years, the increase in value of an average pension fund has been roughly ten times more than the return on cash deposits. And that was before interest rates were halved.

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