In the first cut of its kind since 2009, the governor of the Bank of England, Mark Carney also announced that the central bank has restarted its quantitative easing (QE) programme, with plans to purchase an additional £60bn ($80bn, €71.4bn) in gilts in a bid to offset the economic slowdown following the Brexit vote.
Nigel Green, chief executive and founder of IFA firm deVere Group, described the cut as a "painful bloody nose" to pensioners and savers, explaining that it will hit million of British expats retired overseas.
“This really is a toxic combination for millions of people who rely on pensions and savings.
"Not only do [British expats] face the same serious challenges of pensioners and savers in the UK, they also have to deal with the impact of a falling pound. The drop negatively hits their fixed income, meaning that life becomes more expensive in their countries of residence,” said Green.
Steven Cameron, pensions director at Aegon, says the unprecedented low rate means it is now the “worst time ever to be making a retirement decision”, explaining that those looking to buy an annuity – often underpinned by gilt yields and base rates - will be locked into “super-low returns for life”.
“After seven years of low rates, there’s no guarantee we’ll see any significant improvement in interest rates or annuity terms in the short term,” he said.
Defined benefit deficits
There also concerns that a lower base rate will put downward pressure on gilt yields – traditionally used to value the liabilities on defined benefit pension schemes. A drop in such yields is expected to increase any pension fund deficits.
Last week, yields on benchmark 10-year gilts dipped to a new low of 0.68% in anticipation of the rate cut.
Steve Webb, director of policy at Royal London, explains: “Measured deficits on company pension funds are already at record levels and further falls in interest rates are likely to make matters worse.
“The challenge will be to strike the right balance between making sure that firms which can afford to do so put money into their pension fund but that this pressure does not become so extreme that it kills the goose that lays the golden egg.”
The BoE's Monetary Policy Committee (MPC) predicts that QE will have a neutral influence on pension funds as the value of assets will increase at the same time that liabilities rise.
"That the MPC assessed the impact on pension funds of further yield declines as being relatively limited looks courageous," said Toby Nangle, head of mult-asset allocation at Columbia Threadneedle.
"Their assessment that the overall size of contributions to defined benefit pension schemes have been stable over 20 years despite fluctuations in the size of their deficits deserves further scrutiny."