Negative interest rates: How will savings, mortgages & pensions be affected by BoE option?

How will negative rates impact pensions?

Pension assets have already been impacted by coronavirus this year but should negative interest rates be introduced, they could receive a double blow which will impact holders and the companies managing them.

Andrew began: “Negative interest rates will unsettle the nerves of many consumers – and unfortunately, retirement planners are no exception.

“Firstly, negative interest rates will play havoc for defined benefit pension (DB) schemes.

“Put simply, low interest rates will cause pension liabilities – the amount of money a company has to account for in order to make future pension payments to employees – to increase sharply.

“Sky-high liabilities will be unaffordable for many companies.

“So, they many need to alter their schemes. Indeed, we could see more companies switching to more reasonable defined contribution plans, as they rely on both employee and employer contributions. However, for employees who have based their retirement strategy on DB schemes, this could pose a problem.”

Being moved from a DB scheme to DC could be problematic for pension holders as DB plans (also known as final salary pensions) are generally much more generous than their contribution based counterparts.