Many pension funds automatically move investors into bonds and cash as they approach retirement, as they are considered less volatile and risky than stocks and shares. A bond is effectively an IOU for a loan, either to a company or a government. If you invest in a bond you receive interest on the loan (normally at a fixed rate), with the capital being paid back at the end of the term. A company bond is called a corporate bond and a UK government bond is a gilt.
When interest rates rise, bond prices tend to fall and their yields increase. Conversely, when interest rates go down, bond prices rise and yields fall, as investors are often tempted back to cash savings when savings accounts are paying higher interest rates.
Steeper interest rates can therefore have a big impact on the value of your pension savings if you have a significant amount invested in bonds or gilts. It’s therefore vital to check where your pension is invested to see how you might be affected by a change in interest rates. Find out more in our article Where is my pension invested?
It’s worth noting that rising bond yields can be good news for anyone looking to buy an annuity, or income for life, as it should mean they are able to secure a better income stream. Find out more about how annuities work in our article Annuities explained.
If you want personal recommendations about where to invest your retirement savings, or what to do with your pension once you reach retirement, you’ll need to seek professional financial advice. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
If you think you might be interested in speaking with a financial advisor, VouchedFor is currently offering Rest Less members a free pension check with a local well-rated financial advisor. There’s no obligation, but once you’ve had your check, the advisor will discuss the potential for an ongoing paid relationship if you think it might be useful to you.