Wednesday, 8 April 2009

No win situation.

The Reserve bank has lowered official interest rates to three percent. Those hoping for a drop in mortgage rates will be disappointed. One bank has refused any change - another has agreed to a partial drop - and the other two are " considering their position ".

There is another side to interest rates. The return our investments bring and this is critically important to self funded retirees.

There is a huge pool of people who do not draw an aged pension - and an even bigger pool who draw a part pension because they made provision for their retirement. The drop in interest rates will further erode the dividends they live on - and that will have dire consequences for welfare payments.

Getting a pension depends on two things - the value of the assets you have - excluding the family home - and the amount of income you receive from those assets. A sliding scale of values either bars you from any pension - or entitles you to a part pension.

Once income drops because of lower interest rates the self funded find themselves dipping into capital. As capital dwindles more and more become eligible for a part pension - and those on a part pension move closer to a full pension.

And so the boomerang comes full circle !

To fund those additional pensions the public purse needs more money - and the only source of money is an increase in taxation across the whole tax spectrum.

At the same time, government policy would have no option than to slow warranted pension increases - and subject pensioners to a lower standard of living.

We certainly need to provide relief for mortgage holders, but we should also be fully aware that there is a flow on effect from cuts in interest rates - and eventually that will affect every man, woman and child in this country.

Interest rates can be a mixed blessing !

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