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How will the latest interest rate rise affect my retirement?

Updated 20 November 2023

4min read

Craig Rickman
Senior Content Writer

With interest rates hitting a new 14-year high and the pension reforms arriving in just a few weeks, it's important to review your retirement savings.

Another Bank of England (BoE) meeting, another interest rate hike. The UK central bank's Monetary Policy Committee (MPC) has met 11 times since December 2021, increasing rates on every occasion.

The latest rise has jacked the UK base rate up 0.25 percentage points to 4.25 per cent, a fresh 14-year high. 

Any doubts about what action the MPC would take were laid to rest on Wednesday after it was revealed inflation unexpectedly rose to 10.4 per cent in February, reversing three consecutive months of declines. 

The MPC voted 7-2 in favour of rates going up as the BoE continues its fight to get inflation under control.

With the cost of living worsening rather than improving, further rate rises may well be on the cards.

Only a week or so ago, in his spring budget speech, chancellor Jeremy Hunt announced inflation is set to fall below 3 per cent by the end of year, a prediction that’s now looking a touch ambitious.

That said, a lot can happen between now and 31 December. The BoE will hope February’s jump proves a blip, with inflation resuming its downward slide next month. 

Rising interest rates affect most of us in one way or another, but those of you either approaching retirement, or already retired, may be particularly concerned about what the latest hike means for you. 

You might also be weighing up your retirement options in light of the new pension rules and allowances unveiled at the spring budget. 

Here’s what you need to know. 

Annuity boost

If you’re thinking about buying a secure income in retirement, such as an annuity, higher interest rates are a good thing. 

With an annuity you trade some or all your retirement pot for a fixed, guaranteed income for life. The rates offered by annuity providers are closely linked to interest rates. In short, when rates rise, annuity deals typically improve. 

Since the BoE started raising rates in December 2021, annuity rates have shot up as much as 50 per cent. 

If you’ve already purchased an annuity, the latest rate rise will not affect you.

But those either approaching retirement or thinking about swapping your drawdown pot for a secure income, should, in theory, soon have access to better deals. 

However, be aware that some providers may have already priced in the latest rate rise.

If you have decided an annuity is the right product for you, the key is to shop around to find the best deal.

You should also make sure you disclose your health and lifestyle conditions when applying, as this can boost your income by up to 40 per cent. 

Your savings

Any money you have in cash savings, whether inside your pension or held in other accounts, should benefit from the recent rate rise, as banks should increase the interest rates on offer.

It may take a while for these to filter through, as banks have been sluggish to pass on these rises in the past.

If you are prepared to lose access to your money for a set period of either one, two or five years, you can gain access to better rates. 

However, yesterday’s rate rise will not affect any savings that you have already locked into a fixed rate. 

The chances are that your retirement savings will be invested in the stock market, which has struggled in the past few weeks.

The FTSE 100 tanked 8 per cent in just 21 days recently, despite a promising start to the year.

In theory, as interest rates and markets tend to move in opposite directions, the rate hike should spell bad news for any money you have invested in stocks and shares.

But it’s not quite that simple – stock market performance is influenced by several factors, not just interest rates. The FTSE 100 hit an all-time high earlier this year, despite interest rates rising. 

We can expect further market volatility as the year pans out, regardless of what happens with interest rates.

So, if you are fast approaching retirement, it’s time to think carefully about how you would prefer to draw income in retirement. 

For those in retirement using income drawdown, now is a good time to revisit your investment strategy.

This will make sure your savings are positioned to meet both your short term and long-term income needs. 

Your borrowings

With any luck, you will be debt free by the time you hit retirement. But we appreciate it isn’t always that straightforward. Life has habit of throwing us curveballs and sometimes things don’t go to plan. 

That said, with interest rates going up again, borrowing will become more expensive.

If you have any outstanding loans, such as a mortgage - especially if it’s on a variable rate - now is the time to consider either paying them off or reducing them.  

This is particularly the case for any high-interest debt, such as credit and store cards, where costs can rack up quickly. 

You should, however, heed caution if you’re thinking about accessing your pension early to clear. 

Not only might you compromise your future income goals, but you may also pay tax on any income or lump sums that you draw and could also face restrictions on what you can contribute towards a pension in the future and get tax relief - due to something called the money purchase annual allowance (MPAA).

However, the MPAA is increasing from £4,000 to £10,000 from April, giving some extra scope in this area. 

Time to seek advice

As mentioned above, the BoE is increasing rates to curb the rising cost of living, which is stubbornly refusing to ease.  

Whether you are approaching retirement or already drawing income from your savings, soaring costs put extra pressure on the decisions you make with your retirement funds. It makes it trickier to work out the best way to secure an income that is sustainable for the rest of your life. 

To make sure you are making the right choices for both your current and future finances, it’s wise to seek expert advice from a regulated financial adviser.

This can provide the peace of mind whatever happens with interest rates, your retirement will stay on track.

A financial adviser can also identify any opportunities to improve your wealth. 

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About the author
Craig Rickman is senior content writer at unbiased.co.uk. He has been writing about personal finance and wealth management since 2016, including four years as a journalist at the Financial Times Group. Prior to this, Craig spent eight years working as a regulated financial adviser. He holds the CII level 4 Diploma in Financial Planning.