Economists fear interest rates could remain at record low levels for another decade, affecting retirement funds



Posted on: 1st June 2018

Economists fear Britain’s savers could face 20 years of misery with interest rates remaining at rock-bottom levels. Economists at Berenberg Bank believe that desperate savings by savers in their 50s and 60s will create a glut of cash that will inevitably force down market rates. After enduring 10 years of record low-interest rates following the 2008 financial crisis, the extra pressure generated from savings could, in theory, mean another 10 years at sub-2 per cent interest rates and, therefore, even more misery for Britain’s savers.

Speaking about the gloomy financial forecast that could lie ahead, Nick Anderson, from Berenberg Bank, said:

“Interest rates will be lower for (a lot) longer, and potentially remain at these levels for at least another decade.”

“If this sounds unrealistic, history is clear. Across developed economies between the early Thirties and the mid-Fifties, interest rates remained at very low levels. In the case of the US, Canada, the UK and the Netherlands short rates were close to zero throughout this two-decade period,” he added.

Britons Must Save More for their Retirement

On average, Britons are saving far less, both in the early years and throughout their working lives for retirement than they need to: or at least they are if they are hoping to retire on an income of roughly two-thirds of their working earnings. Yet many people still fail to appreciate how much they will need to save to live comfortably in retirement.

The Pensions of Lifetime Association (PLSA) estimates that the state pension, plus private savings of 8 per cent of earnings – the target auto-enrolment introduced – should provide the average worker with a retirement income of 45 percent of their pre-pension earnings.

To generate a retirement fund of 67 per cent – or two-thirds of working earnings private savings will need to increase to 12 per cent of earnings. The PLSA estimates that there is currently a significant shortfall and that approximately 50 per cent of households are at “high risk” and are unlikely to reach this goal.

The Risk of Relying on Property Value for a Comfortable Retirement

A number of recent studies have shown that many workers are now increasingly planning to rely on property to provide funds for their retirement, rather than investing in workplace pensions. However, Nick Andersons fears that this may be an unsatisfactory solution, as selling, downsizing or releasing equity are risky options.

He also believes that many workers in their 50s and 60s often only appreciate their predicament when it is too late. This then leads to a surge in savings by those close to their planned retirement age and lower spending amongst the recently-retired:

“Economics 101 says that people save regularly throughout their careers and then stop on retirement. The evidence from Japan and elsewhere, however, suggested that something different was happening,” he said.

“People leave saving for retirement to later in their careers, usually save too little and become cautious once in retirement. If planned savings actually rise, rather than fall, as people approach and then enter retirement, then this will create a headwind for real interest rates,” he added.

State pensions are also coming under pressure as populations age. This creates more pensioners and, crucially, fewer workers paying taxes to support them. In much of Europe, Berenberg Bank predicts that provisions for the state pension will have to be cut by an average of 30 per cent per person in the coming decades to make the retirement benefits more affordable. However, Britain should not be affected to the same degree as the state pension is already comparatively low and the shift in demographics is also less severe.

Talk to Haven IFA

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