The Bank of England’s Monetary Policy Committee (MPC) has confirmed it will keep interest rates at their current level but what does that mean for your pensions, savings and mortgage?
Earlier today, the central bank’s MPC members voted by a majority of six to three to keep the UK’s base rate at 4.75 per cent. Three of the committee members preferred slashing rates to 4.5 per cent.
What is the base rate?
The base rate, otherwise known as the Bank Rate, determines the interest rate at which the Bank of England charges high street banks and building societies for holding money in the financial institution.
As such, the base rate influences the interest rates those banks attach to their mortgage products and savings accounts. In recent years, the Bank has raised the rates to a 16-year high of 5.25 per cent.
This has been in response to the UK’s soaring consumer price index (CPI) inflation rate. However, with inflation close to the Bank of England’s target of two per cent, the MPC has cut rates to 4.75 per cent. How will this impact pensions, savings and mortgages long-term?
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How will the Bank’s base rate vote influence your pensions, savings and mortgage?
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How will pensions be affected by the Bank of England’s interest rate decision?
Despite retirement savings not being directly impacted by the base rate, analysts are reminding Britons of how interest rates shape annuity payments. An annuity converts someone’s savings pot into a guaranteed pension for life. It is popular among those approaching retirement who want a reliable income.
Savings have benefited from the recent trend of high rates but Quilter financial planner Holly Tomlinson warns the central bank is likely to announce cuts in 2025 despite its decision to hold the base rate earlier today.
She explained: “High interest rates have supported better annuity payouts, but retirees should be aware that next year’s anticipated rate cuts could make annuities less attractive. If an annuity is part of your retirement plan, acting soon might secure a higher income.
“Those using drawdown strategies should take this period of stability to review their portfolios and ensure they balance immediate income needs with long-term growth potential.”
Savers have benefited from the Bank of England’s interest rate decision making
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How will savings be affected by the Bank of England’s base rate decision?
Borrowers, including mortgage holders and those in debt, have struggled in recent years under the Bank of England’s decision-making in recent years but savers have benefited tremendously.
Banks and building societies, including Nationwide, NatWest, first direct and Santander, have offered rates on accounts of up to seven and eight per cent. Looking to the future, Tomlinson urged Britons to lock in a fixed rate account as soon as possible.
The financial planner added: “The continued high rates are a win for savers, with attractive returns still available on savings accounts and cash ISAs. However, with rate cuts likely next year, locking in a fixed-rate account now could protect your money from the impact of falling interest rates.
“If you haven’t reviewed your savings recently, now is a good time to shop around for competitive deals as they won’t be around forever. For savers and some investors, the hold offers stability for now.”
How will mortgages be affected by the Bank of England base rate decision?
Mortgage rates have skyrocketed in response to actions from the central bank. Based on figures from Moneyfactscompare, the average standard variable rate now sits at 7.85 per cent.
Furthermore, the average two-year, five-year and 10-year fixed rate mortgages currently sit at 5.52 per cent, 5.28 per cent and 5.69 per cent. Homeowners are being reminded to lock in the best deal possible before coming to an end of their fixed deal.
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“For homeowners and buyers, the hold means there’s no immediate relief,” Tomlinson said. “Those with tracker or variable-rate mortgages will see no changes to their repayments, and fixed-rate products remain expensive compared to pre-pandemic levels.
“While the expected cuts in 2025 could bring some respite, they are likely to be small and gradual, meaning rates will remain relatively high. If you’re approaching the end of your fixed term, start exploring options with a broker now to avoid surprises.”
In summation of today’s announcement, the Quilter financial planner shared: “For savers, borrowers, and investors, the key is to plan ahead, review your financial situation, and seek advice where needed to ensure you’re well-prepared for the year ahead.”
The Bank of England’s MPC will next make an interest rate announcement on February 6, 2025. The latest inflation figures from the Office for National Statistics (ONS) found the CPI rate jumped to 2.6 per cent for the 12 months to November 2024.
