The Bank of England has raised interest rates from 0.5% to 0.75% after much speculation.
Expectations of a strengthening economy, solid employment levels, more consumer spending and the potential for wages to rise have all played a part in the decision.
The Bank’s main priority is to keep the rising cost of living – known as inflation – under control. It uses its key interest rate, known as the Bank rate or base rate, which is the reference point for how much banks and building societies pay savers and charge borrowers in interest.
Generally, a rise in the Bank rate is good for the UK’s 45 million savers and bad for borrowers – but the reality is a bit more nuanced.
Here are the key points.
Five interest rate facts (bbc.co.uk)
- More than 3.5 million residential mortgages are on a variable or tracker rate
- The average standard variable rate mortgage is 4.72%
- On a £150,000 variable mortgage, a rise to 0.75% is likely to increase the annual cost by £224
- A Bank rate rise does not guarantee the equivalent increase in interest paid to savers. Half did not move after the last rate rise
- No easy access savings account at a major High Street bank pays interest of more than 0.5%
Savers
When base rates rise, so do savings rates, in theory.
But it depends on the extent to which banks and building societies want to increase their deposits.
So after November’s rate increase, banks were slow to pass on any rise to savers, or they typically passed on a fraction of the full increase.
In fact, half of all savings accounts did not move at all after the last Bank rate rise in November. Commentators say savers could probably expect something similar this time.
According to the Bank of England, returns on longer-term cash Individual Savings Accounts (ISAs) were little changed in December.
Yet they jumped significantly in January, with average returns on cash ISAs going up from 0.36% to 0.94%.
In February and March they held steady at 0.86%, before falling subsequently to 0.63% by the end of June.
For the average cash Isa saver with £11,200 locked away, the latest rise – if passed on – could mean £28 more a year in interest.
Retirement income
Any rate rise might also good for retirees buying an annuity – a financial product that provides an income for life.
Annuity rates follow the yields – or interest rates – on long-dated government bonds, otherwise known as gilts.
These yields could be expected to rise amid an environment of rising interest rates, giving retirees better value for money when they buy an annuity.
Back in November 2011, a 65-year-old buying a joint annuity for £100,000 would have got an annual income of £5,404. Last year, that had dropped by £1,318 to £4,086. (bbc.co.uk)
However, by now this has risen to about £4,670.
Depending on how the market views the likelihood of further base rate rises, annuity rates may continue to creep up.
According to William Burrows, of Better Retirement, a 1% rise in gilt yields translates into an 8% rise in annuity rates – but this remains a long-term consideration.
But we are still a long way from the heady days of the 1990s, when a £100,000 pension pot would have bought an annual income of about £15,000 a year.
The above demonstrates the importance of seeking professional advice to make your savings work harder and, considering suitable plans that could provide a guaranteed income.
Most financial advisers will offer an initial meeting, at their expense, in order to help establish what your needs are and the options available to both improve returns and, in many instances, more importantly the tax efficiency.
John Merrifield.
Dip PFS, Cert (CII) MP.
This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned about the content hereof and any such action or inaction. Professional advice is necessary for every case.