Negative interest rate?

Southend1

Just received the annual statement for a deferred occupational DC pension. It has a projected pension amount at retirement age of approx £3500. The assumptions state that an underlying interest rate of -0.4% has been used in calculating the cost of converting the pension account to a pension and that my fund will be used to buy a pension that increases annually in line with RPI, assuming a net interest of -0.4%.

Can anyone enlighten me as to what is this interest rate of -0.4% and what it means for the pension projection?

bigfreddiel

A negative interest rate means your savings will be reduced by that amount, effectively the provider is charging you to keep your money

Cheers fj

sandsy

It means that the annuity interest rate is 0.4% below the expected rate of inflation. It reflects the real yields on index linked gilts which are the type of assets that providers of RPI linked annuities might typically invest in. So it's not negative in nominal terms, just in real terms.


As such a rate is historically low, it's effectively saying it's pretty expensive to buy an RPI linked annuity if you were doing so at the moment. If the rate was higher (positive), you'd get higher expected starting annuity payment as the insurance company would be able to get a better return on the underlying assets.

Southend1

Thanks sandsy. So if gilt yields improve in the coming years, all other things being equal, the forecast amount of annual pension would increase accordingly? What is a more normal/historically average rate?

Southend1

bigfreddiel wrote: »

A negative interest rate means your savings will be reduced by that amount, effectively the provider is charging you to keep your money

Cheers fj

Thanks, I get that in relation to a bank account but I think it's slightly different in this context?

Southend1

Also, I noticed that the assumed inflation rate is 2.5%. If the assumption was changed to 2% would this make the real interest rate +0.1%? What magnitude of effect would that have on the pension amount achievable?

brewerdave

@southend1-don't suppose it was an ABF pension? I rec'd a similar letter yesterday and it puzzled me also - however, as the expected pension is only a few hundred a year I wasn't desperately bothered!!

dunstonh

Are you sure it says interest rate?

Pension projections have started using a negative at the lower end and -0.4% is a figure you frequently see used. However, it is an example rate and not an interest rate.

Triumph13

dunstonh wrote: »

Are you sure it says interest rate?

Pension projections have started using a negative at the lower end and -0.4% is a figure you frequently see used. However, it is an example rate and not an interest rate.

They use the same term on my annual statements:
"Your fund will be used to buy a pension that increases each year in line with inflation, assuming a net interest rate of -0.6% per year."


As previously noted it just means a negative real interest rate on gilts - which is why indexed annuities are coming out at a smaller number than you'd get if you divided the size of the pot by the average life expectancy.

sandsy

dunstonh wrote: »

Are you sure it says interest rate?

Pension projections have started using a negative at the lower end and -0.4% is a figure you frequently see used. However, it is an example rate and not an interest rate.

It's an assumed annuity interest rate for an index-linked annuity and is based on the index linked gilt yields in mid-February each year, according to both FRC's TM1 for SMPIs and FCA's projection rules.

Southend1

brewerdave wrote: »

@southend1-don't suppose it was an ABF pension? I rec'd a similar letter yesterday and it puzzled me also - however, as the expected pension is only a few hundred a year I wasn't desperately bothered!!

Yes well guessed it is indeed an a ABF pension!

They seem very behind on their statements since the switch to target date funds.