Becky O’Connor, Director of Public Affairs at PensionBee, commented: “In isolation, higher interest rates would normally be considered good news for savers and older people looking to take out an annuity - a secure form of income in retirement. That’s because rising interest rates increase the returns available for both.
But higher rates when coupled with even higher inflation, as we are currently experiencing, suit no one. When rate rises are dwarfed by inflation, even savers find it hard to cheer.
The current macroeconomic situation feels like the worst of all worlds for people trying to make their money grow over time, like workers with pensions, or those trying to preserve its value to make it last through retirement, such as those who have started to take an income from their pensions.
And as inflation creeps higher, leaving interest rates and also stock market returns lagging, savers and investors, including people paying into their pensions, might begin to wonder whether they will ever get ahead.
While it is true that higher interest rates should, in theory, bring down inflation, that hasn’t started to happen yet. Until it does, it’s hard even for those who theoretically benefit to feel pleased. But the good news is that the Office for Budget Responsibility has forecast that inflation will fall to 2.9% by the end of this year. At that point, if interest rates remain roughly where they are now, cash savings will look more rewarding for those seeking a secure and accessible place to store their money and a more stable stock market environment should be good news for pension investors, too.
In the meantime, it’s important for pension savers and retirees to focus on controlling what they can control, which includes increasing contributions if you can and making sure your money is invested correctly for your financial goals, whether that’s long term growth or taking an income.”
Simeon Willis, Chief Investment Officer at XPS Pensions Group, commented: “Typically, a rate rise coupled with the prospect of falling long-term inflation usually spells good news for pension schemes. However, over March we have seen a reduction in long-term gilt yields as expectations over future rates rises have been pared back and so many under hedged schemes will have seen funding levels deteriorate over the month despite this rates rise. Elsewhere, and given the current turmoil within the banking sector, pension schemes will also be keeping a close eye on the financial markets in the hope that this announcement does not have an adverse impact on equity and credit markets, which is the other key driver in scheme funding levels.”
Dean Butler, Managing Director for Customer at Standard Life said: ‘Today’s 0.25% rise in the Bank of England base interest rate, while potentially good news for people whose savings outweigh their borrowing, adds further pressure to the significant minority of retirees who still have a mortgage to pay. Only a year ago we were in a completely different environment – it’s difficult to believe that the rate was still below 1% until last May. The speed and severity of the change has taken everyone by surprise, and retirees who were living quite comfortably in the spring of 2022 might now find themselves struggling, particularly as rate rises have been coupled with double-digit inflation.’
Home ownership and retirement living standards
‘Most estimates of the savings you need to live comfortably in retirement, including the Pensions and Lifetime Savings Association (PLSA’s) Retirement Living Standards, assume no housing costs – however, this is not the case for all. Recent Phoenix Insights* research found 13% of retirees contacted were not homeowners, and so would find themselves paying a mortgage or on the receiving end of a rent increase as a result of higher rates.
Short-term pressure versus long-term planning
‘Retirees struggling to pay for their increased housing costs might naturally be tempted to dip further into their pension savings. While in many cases this will be a sensible decision, there’s always the risk of running out pension savings later in life. We would urge people to first look at ways in which they can review their budgets and it’s also worth checking entitlement to state benefits - a good first port of call for this is to visit the benefits calculators page on the government website GOV.UK. Many benefits are hugely unclaimed, including Pensions Credit.’
Chris Arcari, Head of Capital Markets, Hymans Robertson says: “Yesterday’s upside inflation surprise, alongside an economy that has shown surprising resilience recently, will have emboldened the Bank of England to raise rates 0.25% p.a. today, to 4.25% p.a. February’s inflation figures revealed headline inflation rose to 10.4% year-on-year while core inflation, which excludes volatile energy and food prices, rose to 6.2% year-on-year. Market expectations of interest rates have fallen sharply recently on the back of concerns around the banking sector on both sides of the Atlantic, but markets were still pricing a more than even chance of a 0.25% p.a. rise.
“While most forecasts expect inflation to decline reasonably sharply this year, notwithstanding yesterday’s upside surprise and the likely tightening in bank credit standards following weakness in the sector, may mean central bank’s will have less of the leg work to do, there are still ample reasons for the BoE to have raised rates. A tight labour market, which is seeing year-on-year wage growth of 6.5% year-on-year, is maintaining pressure on core services inflation, which in turn is keeping central bankers nervous of the possibility a self-fulfilling wage-price spiral takes hold. Furthermore, central banks have sufficient tools to provide liquidity to the financial system to ensure financial stability, whilst still raising interest rates to reign in excess demand.”
|
