Ahead of the curve

(Dec 20, 2011)

In an earlier post we looked at the implications for savers of the historically low interest rates in the UK.  Low interest rates are a policy response to the unusual economic conditions in which the developed world currently finds itself.  Besides being bad for savers, low interest rates increase the value of liabilities for pension schemes and can thus aggravate pension deficits.

However, these record low interest rates only apply in the short term, with a steep rise to a more normal longer-term rate.  This is shown in Figure 1, which plots the redemption yields for UK government gilts on 16th December 2011.  The points appear to follow a smooth underlying pattern, known as the yield curve.

Figure 1. Redemption…

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Tags: interest, yield curve

Interesting times

(Jan 12, 2009)

The Bank of England has reduced its current bank rate to 1.5%, the lowest since it was founded in 1694.  Whilst this is good news for borrowers, it is bad news for those in retirement who are living off the interest on their savings.  In fact, low interest rates are doubly bad for savers: not only is interest income reduced, but government rules on withdrawing benefits assume that people earn more interest than they actually now do.  A rate of 1.5% interest would yield just £150 a year of taxable interest on a lump sum of £10,000.  What are pensioner savers to do?

One solution is to buy an annuity.  That same sum used to buy the best annuity for a 60-year-old would yield taxable annuity payments over four times greater than…

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Tags: interest, annuities

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