What do fluctuating interest rates mean for your pension?

As interest rates rise and fall, the value of pension funds can experience volatility. However, multi-asset funds can present a robust solution for retirement planning, offering a diversified approach that insulates investments across all areas of the market cycle.

At Zurich, we recognise the importance of adaptability in managing your retirement savings. Our actively managed funds afford our experienced fund managers the flexibility to make strategic decisions based on evolving market events, helping your pension to remain resilient and well-positioned for growth amidst changing economic conditions. 

Inflation in the Euro Area and the US has proven sticky as it nears the 2% target level. Despite this, the ECB has resumed its rate cutting cycle, while the Federal Reserve has opted for a more cautious approach. Central banks are also juggling the prospect of economic slowdowns, and the ECB in particular must consider recent plans to bolster European defence spending. Moreover, a potential trade war induced by import tariffs may raise the prices of goods for consumers on both sides of the Atlantic, thereby reversing the pattern of falling inflation over the past two years.

Uncertainty surrounding the imposition of tariffs and the effects they may have has made it even more difficult for central banks to decide on the appropriate steps to take, which subsequently makes projections for future interest rate changes even more obscure.

The case for diversification

Central banks' decisions can reshape the financial landscape, with lower interest rates typically stimulating economic growth and influencing consumer trends. In a lower interest rate environment, equities have traditionally benefitted. In the fixed income market, high-yield bonds may outperform as they attract investors seeking higher returns in a low-interest-rate setting. However, the journey to lower rates is as important as the final rate that policymakers settle on.  

To shield your pension from market fluctuations, multi-asset funds are advantageous in retirement as they provide protection throughout all phases of the market cycle. The Personalised Guide Path strategy from Zurich is based on our risk-targeted range of Prisma multi-asset funds, which diversify investments across multiple asset classes. This strategy is designed to perform well in all market conditions and at every stage of a client's retirement savings journey. 

What are your options at or nearing retirement? 

Defined Contribution participants who are near or in retirement are likely to feel a significant impact from changes in interest rates. High interest rates tend to benefit those seeking income, as they offer higher returns on savings. Since most retirees aim to eliminate debt and increase their savings, usually investing in lower-risk funds with less equity exposure, lowering interest rates can be unwelcome news for those nearing or in retirement. Lower interest rates reduce the returns on safer assets such as bonds or money-market funds. This makes it harder to grow savings through conservative investments, potentially forcing conservative investors to face higher-than-normal risks due to inflation.  

The guaranteed income from an annuity is likely to be lower in a low-rate environment, though annuities may still be suitable for risk-averse retirees who prioritise stable, predictable income, even if that income is lower than it would be in a high-rate period. Approved Retirement Funds (ARFs) offer more flexibility and potential for higher returns but come with the risks of market volatility and the possibility of depleting savings. In a low-interest-rate environment, the choice between an ARF and an annuity largely depends on an individual's risk tolerance and retirement goals. 

Need help deciding? 

Our ‘Annuity or ARF’ tool is useful to help you explore your options or talk to one of our experts to find the best choice for your retirement needs. 

The information contained herein is based on Zurich Life’s understanding of current Revenue practice as at March 2025 and may change in the future. 

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