Bank of England delivers another “bloody nose” to pensioners and savers

The Bank of England’s decision to cut interest rates to 0.25% will deliver “another painful bloody nose” to pensioners and savers , industry experts have warned.

The Bank cut interest rates from 0.50% to a new record low of 0.25% on Thursday, the first interest rate cut since 2009, when the financial crisis was at its peak.

The Bank also announced it was restarting its quantitative easing programme with a range of measures worth up to ￡170 billion to stimulate the economy, including the purchase of ￡10 billion of corporate bonds and government bonds of ￡60 billion.

Nigel Green, CEO and founder of deVere Group, said the measures were a toxic combination for millions of people who rely on pensions and savings.

“By pulling the trigger and cutting interest rates for the first time in seven-and-a-half years today and boosting quantitative easing, the Bank of England has delivered yet another painful bloody nose to pensioners and savers.””

He said with interest rates at a record low, gilt yields would fall, which would increase pension deficits further.

“The scale of these deficits casts doubt on the survival of many company pension schemes and in order to survive they will need to make drastic changes to the terms of employees’ pension schemes,” he said.

Richard Eagling, head of pensions at Moneyfacts, said it was also bad news for those on the verge of retirement who may be looking to secure an income through an annuity.

He said: “It’s likely to add extra downward pressure on annuity rates at a time when they are already at record lows.

“An interest rate cut will also have an adverse impact on the already precarious funding position facing most defined benefit schemes, as lower gilt yields will increase pension liabilities. Employers will need to look at ways of addressing the greater pension deficits that this is likely to create.”

Savers

Holly Mackay, founder and managing director of financial advice website Boring Money, said it was another “nail in the coffin” for savings rates.

She said: “Any saver who had hoped that we might revert to a time when you actually got paid some meaningful interest for holding money in a savings account will be sadly disappointed. Santander’s 123 account is still probably your best bet for cash balances of ￡3,000 – ￡20,000 in an easy access account. They have a ￡5 monthly account fee so check the interest outweighs the charges.

Nationwide pay 5% on balances of up to ￡2500. But do keep an eye on things over the next week as we’d expect to see changes. More recently NatWest has told business customers that it might charge them for the privilege of holding their cash – welcome to negative interest rate discussions which feel counter-intuitive to the world order we know.”

Charlotte Nelson, finance expert at Moneyfacts.co.uk, said: “Today is a bad day to be a saver. Savings rates have already plummeted to record lows, so a cut to interest rates is only going to increase savers’ pain.

“Rates have tumbled since the last base rate change; for example, the average easy access account has fallen from 0.94% in March 2009 to 0.55% today, while the average two-year fixed rate bond fell from 2.83% to 1.31% over the same period.

“The base rate cut does not necessarily mean that providers will pass on the reduction to savers, but seeing as rates are already dropping, this latest change will give them yet another opportunity to cut their rates. Anyone considering switching deals will therefore need to do so sooner rather than later.”