The Bank of England base rate has been just 0.5% for over two and a half years and there are no signs that it will increase soon. The Governor of the Bank of England, Mervyn King, has even hinted that short-term rates might follow the pattern in the USA, where the Federal Reserve has said there is unlikely to be any change before mid-2013.
Although it is short-term rates which have attracted most attention, some medium and longer term interest rates have also been falling. For example, at the start of November 2009 it cost the UK Government 3.67% to borrow money for ten years via gilts (government bonds), whereas by November this year that figure had dropped to 2.25%.
Where there have been falls in interest rates, these have had some significant and unwelcome effects.
Income drawdown
The rules for income drawdown – drawing an income directly from your pension fund – were revised in April 2011. In many instances the combination of this change and the decline in long-term gilt yields has substantially reduced the maximum amount that can be drawn for every £1,000 of fund – the figure now closely matches prevailing annuity rates. Difficult investment conditions over recent times have also had an impact.
If you have been taking drawdown for some years and are due for a review in the near future, you could find that the maximum you can withdraw will fall by up to 50%, according to a recent press report.
Easy access deposit rates
Banks and building societies are still offering new instant access internet accounts with gross interest rates of 3% and more. However, these rates are now almost always achieved because of a special bonus which lasts for one year. After that bonus expires, a much lower rate applies – possibly down to base rate. If you have any savings accounts which have been open for more than 12 months, the chances are that the rate you are receiving is much nearer to base rate – or even below it. The same could well be true of any variable rate individual savings accounts (ISAs) more than a year old.
With inflation uncomfortably above 5%, the buying power of money you leave in an easy access account is being steadily eroded.
Fixed-term deposit rates
Back in October 2008, as the credit crisis peaked, you could have obtained over 7% from a three-year fixed-rate bond. The likelihood that base rates will continue at current levels for some time means that today’s fixed rate offerings are much lower – the best rate for three years is now under 4.50%. National Savings & Investments withdrew their five-year fixed-rate and index-linked savings certificates in early September.
If the decline in yields has affected you, a review of your investments may be worthwhile. The fall in yields has not been universal. For example, over the last year, sterling corporate bonds yields have generally increased because of concern about the state of the global economy and borrowers’ ability to repay. The same worries have seen UK share prices fall and dividend yields rise correspondingly since the start of the year.
The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
Did you know that HMRC have now published the form (APSS227) which must be completed if you wish to claim ‘fixed protection’ for your pension benefits from next tax year? The deadline for the form’s return to HMRC (in Nottingham, not your local office) is 5 April 2012. While the form is relatively simple to complete, the decision to do so is anything but straightforward. For example, opting for fixed protection effectively means all your pension contributions must stop after the end of this tax year. Advice is essential before taking any action. The value of tax reliefs depends on individual circumstances and tax laws can change.