The Bank of England’s (BoE) decision to keep the base interest rate at 5.25 per cent could cause long-term gilt yields to "fall back" and potentially lead to some providers opting to cut annuity rates, Hargreaves Lansdown head of retirement analysis, Helen Morrissey, has said.

The bank’s decision to pause the interest rate at its current level, following a fall in inflation, was the first time it had remained unchanged since December 2021, with 14 successive increases prior to the most recent meeting.

Commenting on the announcement, Morrissey stated: “[The] interest rate pause could cause long-term gilt yields to fall back and, if this is the case, we may see providers opt to cut their annuity rates in the coming weeks.

“Despite this, annuity incomes remain substantially higher than they have for several years and should always be a factor for anyone looking for an element of guaranteed income in retirement.”

XPS Investment senior consultant, Felix Currell, noted that, for pension schemes, longer-term gilt yields remain volatile and are at similar levels experienced during the peak of the gilts crisis, whilst also being more than 1 per cent higher than the lows of November 2022.

“However, these yield rises have occurred over a prolonged period enabling actions from pooled fund LDI managers and trustees to take place in a much more controlled manner, supported by larger collateral buffers in line with new regulatory guidance,” he continued.

“There are still a number of pressure points within the UK gilt markets, including increased supply (through significant extra borrowing expected by the UK government over the next few years and quantitative tightening) and a potential reduction in demand for new gilts as defined benefit (DB) schemes approach a point of having hedged most of their liabilities with existing gilt holdings.

“Vigilance is key for trustees to assess and implement their hedging needs in a volatile market.”

Cardano chief economist, Shweta Singh, said the firm expected a weaker growth environment, both in the UK and abroad, and therefore government bond allocations would prove to be a “valuable diversifying offset” to equity market investments for DB scheme investors’ growth portfolios.

Meanwhile, PensionBee director of public affairs, Becky O’Connor, argued that the BoE’s decision offered welcome stability, if not higher returns, for pension savers and retirees.

“Savings and annuity rates have improved significantly and there is a lot of competition for those looking for a home for cash, or stable income in retirement,” she noted.

“For those considering an annuity, the higher interest rate environment has been a blessing.

“For workers who are saving into a pension, global equity performance has improved in the first half of this year on the back of more economic stability, which is partly due to rising interest rates and lower inflation, to give a brighter overall outlook for long-term returns.”

Standard Life managing director for retail direct, Dean Butler, concluded that, whether or not the BoE decides to increase interest rates in the future, the UK was entering “uncharted territory”.

He commented: “For the first time, what looks like a long-term higher interest environment is meeting a world in which responsibility for pension saving is mostly with the individual as defined contribution pensions continue to replace employer guaranteed DB schemes.”

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