What does an interest rate cut mean for my pension?

Interest rate changes can have a big impact on retirees’ income, for better or worse. For people who have a few different types of pension the effects can be magnified. With UK interest rates falling, we look at how a cut in the Bank of England base rate alters the landscape for those at and near retirement.

Pensions are sensitive to changes in interest rates. The Bank of England has cut interest rates from 4% to 3.75% following a cooling in the rate of inflation, as measured by the Consumer Prices Index, as well as slower wages growth.

Interest rates in the UK started falling in the summer of 2024, with the Bank of England cutting rates in August 2024 and again in August 2025, bringing the rate down to 4% by late summer 2025 as inflation eased.

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Further cuts are anticipated into 2026 as the economy cools and inflation stays low. Lenders have been reducing mortgage rates in response – but for millions of people in or approaching retirement the big question is, what do falling interest rates mean for my pension and retirement income?

Adam Cole, retirement specialist at Quilter, said: “An interest rate cut can have very different effects across the pensions landscape, and the impact will depend largely on the type of pension someone holds and what they are planning to do with it.”

Impact of interest rate cut on defined benefit pensions

For members of defined benefit pension schemes, lower interest rates tend to push up pension transfer values – the amount of lump sum you could get instead of receiving a guaranteed, regular income.

This is because the future income promised by the pension scheme becomes discounted at a lower rate, increasing its present value if you transfer out.

While that can make transfer values look more attractive on paper, it does not automatically mean transferring is the right decision, said Cole.

“Giving up a guaranteed, inflation-linked income for life remains a significant step, and one that should only ever be considered with specialist financial advice,” he cautioned.

What does an interest rate cut mean for defined contribution pensions?

For those with defined contribution pensions, the impact of a base rate cut is more nuanced. This is because of how they are invested. While a base rate cut is usually positive for stocks it can mean lower income from bonds.

Cole said: “Rate cuts are often supportive for asset prices, particularly equities, which can benefit pension pots invested for growth. However, they also tend to push bond yields lower, which can affect the long-term income potential of lower-risk assets.”

This highlights the importance of asset allocation and not viewing pensions purely through the lens of short-term interest rate moves, he added.

Impact of an interest rate cut on annuities

Annuities sit somewhere in between defined benefit pensions and defined contribution pension when it comes to the effects of an interest rate cut.

After years of being largely overlooked, annuity rates have improved markedly compared with the ultra-low interest rate environment of the past decade, making guaranteed income more attractive for those who need a source of secure income.

However, annuity pricing remains closely linked to gilt yields, meaning any sustained move lower in interest rates would be expected to put downward pressure on the income available to new buyers.

Cole said: “For those considering an annuity, the trade-off between certainty and flexibility remains key, particularly in an environment where inflation and interest rates remain uncertain.”

Yet ahead of the base rate cut, gilt yields – a key indicator of annuity rates - remained stubbornly high. As a result, annuity rates remain among the most competitive seen in the past decade.

For example, at the start of this year, a Canada Life benchmark lifetime annuity purchased with £100,000 would have provided an annual income of around £6,800 for a healthy 65-year-old. Today, improved rates mean the same individual could secure approximately £7,300 per year – an increase that amounts to nearly £9,500 in additional income over a 20-year retirement, by Canada Life’s calculations.

Should I change my pension after the base rate cut?

Juggling pensions in the face of falling interest rates is no easy thing. If you have several pensions it can be worth speaking to a financial adviser so they can see the whole picture of your various pots.

Cole said: “Overall, changes in interest rates are a reminder that pensions are not a single product but a collection of long-term strategies. Decisions should be made in the context of an individual’s wider retirement plan, rather than reacting to any single rate decision in isolation.”