Rising interest rates: how will they affect your pension planning?

Last week saw the twelfth consecutive hike in interest rates since December last year, during which time the base rate has risen from a record low of 0.1% to the latest increase 0.25% to 4.5%, marking its highest level since 2008.

While Britons have become accustomed to interest rate hikes hitting the headlines for eighteen months, these rises are doing little to achieve their intended goal of returning inflation to the Government’s target of 2%. Indeed, inflation currently remains in double digits, with the Consumer Prices Index (CPI) rising by 10.1% in the 12 months to March 2023.

For pension planners, it is important to consider how the latest rise in interest rates and high inflation could affect your financial planning.

How do rising interest rates affect pensions?

Generally, higher interest rates are advantageous to pension planners, as it can mean that money saved in certain kinds of pension pots will see a larger increase in value.

Although, it is important to note that this is not the case for all pension products. For instance, some investments or pension pots’ returns may be connected to performance of other assets or markets, like stocks and shares, rather than interest rates.

What is more, interest rates provided on savings accounts by banks and pension providers do not always necessarily directly align with changes in the Bank of England rate. For example, there may be a delay before the Bank of England’s rates are implemented on existing products. Another possibility is that the terms of the investment may come with a fixed rate, rather than one that is variable in line with the base rate, and it will therefore be unaffected for a set period of time.

Ultimately the impact of interest rates on one’s pension plan will depend upon your individual. Speaking to your pension provider can help you gain a clearer understanding.

Addressing inflation

Despite high-interest rates often spelling good news for savers, the disparity between the current astronomic inflation and the base rate presents a significant problem. There are very few savings accounts or investments for which the returns would exceed the impact of double-digit inflation, meaning that a vast majority of people’s savings are losing value in real terms regardless of interest rates.

In addition, although inflation is predicted to fall for April, consumers are unlikely to see the benefits of this for some time; this is in large part because of large rises in the price level one year ago, in this case, those that occurred in March 2023, drop out of the annual comparison.

My Pension Expert’s View

With the variables of inflation and interest rates at play, it is important that pension planners take stock of their savings and carefully consider how they may need to adapt their financial planning strategy.

Speaking with an independent financial advisor can help streamline this otherwise complex process, empowering them to take charge of their retirement finances.

Even as interest rates continue to rise, any potential benefit savers might have experienced but a few years ago will likely be bulldozed by inflation – which has remained in double digits for almost a year.

Unsurprisingly, millions of Britons are worried. According to My Pension Expert’s own research from earlier this year, 44% of over-55s currently in work feel the cost-of-living crisis has rendered retirement impossible – a devastating figure, following their decades of hard work and diligent saving.

In these challenging times, it is critical that Britons are empowered to secure their long-term financial aspirations. And this can only be achieved if they have access to the necessary support. The Government, regulators, and the wider financial services sector must take steps to ensure education resources and independent financial advice are readily available. Access to such tools will ensure people can make well-informed financial choices.

it will take time for the government to develop a comprehensive strategy to provide savers with adequate support. However, in the meantime, financial advice is available for those concerned about their retirement plan and savings. Expert advice from advisers, such as our team at My Pension Expert, can help savers find the options right for their retirement goals while considering their current circumstances and market fluctuations. Whilst it might not provide an immediate fix, seeking advice can mark a strong first step on the path towards a financially secure retirement.