Dean Butler, Managing Director for Customer at Standard Life said: ‘The Bank of England’s move to raise the base interest rate another 0.5 points, to 5%, is good news for those whose savings outweigh their borrowing but comes as a real blow to anyone with debt. This includes the significant minority of retirees and those approaching retirement who still have credit cards or a mortgage to pay off. The costs are also likely to filter through to many of those who rent their property too. It’s difficult to believe how different things were until very recently – shockingly, rates only reached 1% last May. The speed and severity of the change has taken everyone by surprise, and people who were financially comfortable in the spring of 2022 might now find themselves struggling and having to reassess their plans, 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 could find themselves paying higher rent due to the knock-on effect of interest rate rises. Levels of home ownership are falling and many people are also taking +30 year mortgages so more people will be approaching retirement with housing costs – in potentially a long-term higher interest environment.’
Interest rates and retirement planning
‘People who were planning to retire in the near future but still have mortgages or other debts face a tricky decision as the cost of borrowing continues to rise. The State Pension by itself isn’t enough for a comfortable retirement even without housing costs or other debts, and many don’t have enough saved in private pensions to bridge the gap. If you’re wondering what to do next it’s always worth taking advice if at all possible, speaking to your pension provider or your HR department at work, or using the Government’s free Pension Wise guidance service.’
PensionBee Director of Public Affairs, Becky O'Connor, commented: "This much trailed interest rate rise will feel like a death sentence to hundreds of thousands of mortgage borrowers with loans coming up for renewal.
For people approaching or in partial retirement who still have mortgages, it could mean working for even longer or even increasing hours again.
The upside for those who are about to retire with a decent enough pension pot and who want guaranteed income when they stop work is that annuity rates are relatively high and edging higher.
Retirees or older workers with a lot of savings amassed could also enjoy higher savings rates on money held in cash accounts - but they will need to shop around for those rates, as not all banks and building societies are passing the increases on."
Simeon Willis, CIO at XPS Pensions Group commented: “In general higher yields are having a beneficial impact on pension scheme funding levels, due to falling liability values. Longer term inflation expectations have been relatively stable in recent weeks so pension schemes and sponsors are generally benefitting from current conditions, but this should not be confused with a good news story. Better funding levels usually equate to more secure pensions for members. However, in this instance the benefit of rising rates has come, to some extent, at a direct cost to members, whose benefits have lost real purchasing power. Some schemes may consider discretionary awards to compensate members, but many are not in sufficiently strong financial positions to consider this. The rise in interest rates that pension schemes have waited over a decade for, has turned out in many respects to be as dismaying as the low interest rate environment that preceded it.”
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