‘Pensioners should not fear’ as interest rates reach 14-year-high

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Bank of England raises interest rates to 4%

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The central bank took decisive action yesterday, raising interest rates to the highest level since the Lehman Brothers filed for bankruptcy in 2008, in the financial crisis. A statement from the bank said: “We’ve raised our interest rate to four percent this month. But by raising interest rates we can bring inflation down sooner, and make sure it stays lower after that.”

Many people will be looking towards how interest rate rises will impact savings and mortgages, however, there will also be an effect for pensioners and pension savers. 

Becky O’Connor, director of public affairs at PensionBee, said: “Interest rate rises do not just affect mortgages and savings rate, they can affect pension pots and retirement plans, too.

“For those retired people drawing an income from their pension savings and choosing to keep some of their wealth in cash savings accounts, a higher interest rate on those savings will be welcome, even though the best buy rates still lag inflation. 

“For retired people whose pensions remain invested in the stock market as they enter retirement, the impact of higher rates will depend on the proportion invested in equities versus the proportion invested in other asset classes, as higher interest rates can affect each differently.”

Some pensioners may be alarmed by a rising interest rate – particularly as the base rate has reached a 14-year-high.

However, Sam Ratnage, chartered advisor at Tideway Wealth and Retirement, urged calm.

He said: “Pensioners should not fear the recent BOE announcement increasing the base rate to four percent. This increase was expected and largely priced into the majority of investment markets.

“Pensions and investments now have a better outlook boosted by an environment of higher interest rates.”

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Increased interest rates are likely to be good news for those who have cash savings, as long as the return is passed on.

However, Alice Haine, personal finance analyst at BestInvest, warned savers need to strike an appropriate balance if they are planning towards retirement.

She explained: “Pension savers should not focus on higher rates on saving accounts in expense of pensions.

“Money invested in a pension not only benefits from compounding over the long term.

“But it also protects against income tax (on the rise thanks to frozen tax thresholds) because tax relief is applied to pension contributions at their marginal rate of income tax.”

But despite interest rates increasing once again, inflation continues to remain high at 10.5 percent.

Although the Bank of England believes inflation will fall substantially this year, it is still impacting the pockets of older people – especially when it comes to the state pension.

Rio Stedford, financial planning expert at Quilter, stated: “While many pensioners don’t have much debt to speak of as they typically own their house outright, high inflation means that their regular pension payments may not cover their living expenses as they did before. 

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“Although the state pension has increased in line with inflation, some pension plans may not keep pace with inflation, reducing the value of benefits over time. 

“This can result in a lower standard of living and increased financial stress.”

However, Ms O’Connor stressed higher interest rates could be good news for those opting for an annuity.

An annuity offers a guaranteed income for life or for a set amount of time, when a person purchases one with their pension pot.

While annuity rates have already been increasing due in part to nine previously consecutive boosts to the base rate, they could get even better.

As a result, the expert suggested they are “increasingly worth considering” for retired people. 

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