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Record interest rates rise still overshadowed by inflation concerns

The headlines have become familiar over the past ten months… Bank of England (BoE) announces interest rates hike

Today’s news was no different. It is the seventh consecutive meeting of the BoE’s Monetary Policy Committee that has ended with a vote in favour of increasing the base rate. This time resulting in an increase of 0.5%.

There were murmurs of a jump of 0.75%, following the example set by the European Central Bank earlier this month and the US Federal Reserve just yesterday. However, this still means that since December last year, interest rates have risen from a record low of 0.1% to the current 2.25%.

Inflation may have dipped slightly in August, dropping from 10.1% to 9.9%, but that figure remains far too high for the BoE’s liking – it aims for inflation to hover no higher than 2%. Increasing interest rates is seen as the main weapon in a central bank’s arsenal for bringing inflation back under control.

But what might this mean for pension planners?

Are higher interest rates good for pension pots?

Generally speaking, higher interest rates are good for savings, including pensions. It means that money saved in many types of accounts are earning better interest, helping those pots grow over time.

However, pension planners must acknowledge that the returns on some pension pots might not be linked to interest rates. Indeed, many investments do not relate to interest rates directly – their performance is instead based on the fluctuations of other assets or markets, such as stocks and shares.

As we noted when we last wrote on this subject in early August, the BoE’s base rate is not always reflected in the interest rates offered by different pension providers, or indeed banks, where their general savings accounts are concerned. Sometimes there can be a delay before updated rates are implemented, or else the terms of the investment might have fixed rates rather than ones that track the base rate, meaning there will not be any changes across a set period of time.

What can be done about high inflation?

Putting to one side the question of whether higher interest rates actually affect the performance of one’s pension savings, there is another important question concerning the impact of inflation.

That inflation has fallen just below 10% will do little to ease the financial strains being placed on people across the UK. Many experts are still predicting the figure to rise again in the months to come.

In short, this means that the prices of everyday items and household expenditures will be rising at a faster rate than interest rates. So, money left in savings accounts is likely to be ‘losing value in real terms’, at least for now.

This imbalance is causing headaches for those in and nearing retirement, as My Pension Expert’s recent research revealed.

We found that as many as 37% of over-40s in the UK believe the cost-of-living crisis has made retirement impossible for the foreseeable future.

Meanwhile, more than a third (34%) of UK retirees are worried they will no longer be able to sustain their desired lifestyle in retirement as the cost-of-living increases so sharply.

And this might be forcing some into making rash financial decisions. Indeed, our research also found that almost one in ten (7%) of savers have moved some or all or their pension savings into riskier investments to help their money hold its value against inflation. Whilst this might suit some, deciding to do so without seeking independent financial advice could result in an individual inflicting irreversibly damaging their financial future.

Britons must try to remain calm and seek independent financial advice. After all advisers, like our team at My Pension Expert, explore all options available to create the right strategy catered toward a person’s specific needs, factoring in the current economic climate.

Understandably, such a predicament will likely unnerve many. However, pension planners can find reassurance by seeking independent financial advice. Whilst it might not provide an immediate fix, seeking advice will mark a strong first step in setting savers on the path towards a financially secure retirement.

Get in touch today to find out how we could help you.