Why income is important now
Savers have always been hungry for income, but since the Bank of England has been holding rates at ultra low levels, they are receiving derisory rates for return.
Meanwhile bond yields are also close to historic lows and, as interest rates rise, bond holders could suffer losses if their capital value falls. Many people are desperate to find somewhere to place their savings and use it to achieve inflation-beating returns.
Rising interest rate environment
While the base rate has been stuck at 0.5% for over five years, economists agree that there’s only one way it can go from here. When the Bank of England finally starts increasing interest rates, any rise is expected to be gradual rather than sharp increases. Savers are unlikely to rush back to cash because it will take time for returns from cash to become attractive again.
Rule changes surrounding pensions
In April 2015 savers were granted full access to their pensions funds by allowing them to withdraw cash either to spend – or re-invest.
This means people are no longer forced to use their pension savings to buy an annuity (an insurance policy that promises to pay a set income for life). They now have more freedom to keep their pensions invested and draw an income from them, rather than having to lose the capital by locking in an annuity contract.
A key consideration for those at retirement should be the balance of accessing savings early versus the likelihood that they’ll live for a long time and will need a steady income. While many still choose an annuity, others will want to retain control over their original fund and put it to work. This involves drawing an income directly from their pension pot, and is referred to as drawdown. Many more are expected to use drawdown to regain control of their own money, choosing income generating funds to provide them with what they need to live on during retirement – or even beforehand for those who are scaling back on work as they get older and want to supplement their new lower salary.
Source: HMRC, Chancellor George Osborne, 2015
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