Retirement is a significant milestone, often the result of decades of hard work and careful planning.
Understanding how factors such as changes in interest rates and inflation impact your savings could help you adjust your strategy to maintain financial stability.
You may pay interest when you borrow money or earn interest when you save. For loans, the interest rate will impact how much money you pay back in total. For a savings account, the rate reflects how much you earn. A mortgage interest rate is a percentage fee charged on a mortgage loan by a lender. [11]
The Bank of England is the UK’s central bank and they meet throughout the year to set base rates. This is what the of England charges other banks and other lenders when they borrow money.
The base rate influences the interest rates that many lenders charge for mortgages, loans and other types of credit they offer people.
In this article, we will explore how interest rates and inflation could influence your pension, saving goals, and overall retirement lifestyle, providing insights for if you are either planning for or already are in retirement in the UK.
Recent UK & US interest rate announcements.
UK interest rates were cut on November 7th by 0.25 percentage points to 4.75% – the second reduction this year, while inflation is currently at 1.7% as per the latest shared data – down from 2.2% in August. [1] [8]
Inflation has fallen significantly since it hit 11.1% in October 2022, which was the highest rate for over 40 years. [2]
In the US, the Federal Reserve also cut interest rates on Thursday by a quarter percentage point to a target range of 4.50%-4.75% – their second reduction of 2024. [3]
Navigating interest rates, inflation and market impact.
You aren’t investing to try and pick and choose the best times to be in and out of the market – you are investing for the long term.
This century, we’ve experienced events ranging from the global financial crisis to the Covid-19 Pandemic and more recently, the invasion of Ukraine. While it can be unsettling to see an initial dip and sharp movement, realising that volatility is a normal part of investing can help to put investors’ minds at ease when the natural reaction is to panic.
By focusing on a long-term goal and remaining patient, investors have the chance to navigate the ups and downs of the market, inflationary pressures and interest rate changes to continue working towards their financial goals.
Understanding economic effects and mortgage rates.
The Bank of England began raising interest rates at the end of 2021 to help reduce inflation, which is now just below the 2% target. [4]
Inflationary pressures have also eased enough that in August, interest rates were cut from 5.25% to 5%, with the potential to gradually reduce further should those pressures continue to ease.[4] Factors that are considered when it comes to making a decision on interest rates include how fast prices are rising, how the UK economy is growing and how many people are in work. [5]
Mortgage rates represent the interest that lenders charge borrowers for home loans. These rates can fluctuate based on several factors, including economic indicators, credit scores and loan terms.
One of the main shields against inflation is choosing a fixed rate mortgage plan. Fixed rate mortgage rates don’t change when the bank rate fluctuates, which means borrowers keep the same rate throughout their fixed mortgage term. This could work as an assurance from inflation changes for a period of time. Your mortgage repayment costs stay the same, allowing you to plan your budget accordingly, however, if the bank rate decreases while you’re in the middle of your fixed rate mortgage term, you won’t get a lower interest rate.
The impact of inflation on your saving goals.
It could be good to know the inflation rate when thinking about savings and investments because it affects whether you make a gain or loss after inflation.
The CPI rate of inflation is by the Office for National Statistics. [9]
If you can stay invested for long enough, your investments could potentially beat inflation in the long run.
Having an account that gives you a return higher than the inflation rate can be a factor in potentially making money on your investment.
To know what’s right for you, it can help to think through your savings goals.
If you’re planning to put money aside for five years or more, it may be better to invest with a more longer-term outlook.
Each year, rising prices means you can buy less with what you had. For example, if you have £100 in cash, based on an inflation rate of 2% that figure would have the buying power of £98 one year later. On the other hand, if your bank account pays 2% interest, you would have £102 in that same time but with the buying power of £100 – meaning you have effectively stayed still.
Interest rates will either be maintained, rise or fall when reviewed by the Bank of England. Therefore, it’s important to understand that if you do choose to invest, unlike cash savings, the value of investments can fall as well as rise and you may get back less than you invest.
How does inflation affect the State Pension?
If you’re currently receiving the State Pension, the inflation rate is one of the factors that can potentially determine the annual increase in your payments.
The triple lock is a commitment to uprate the basic and new State Pension every April by either 2.5%, inflation, or earnings growth – whichever is the highest figure.[10]
It was confirmed in the recent Autumn Budget that the basic and new State Pension will increase by 4.1% in 2025-26, in line with earnings growth on this occasion, meaning over 12 million pensioners will receive up to £470 per year.[7] Working age benefits will also be uprated in full in 2025-26 by the September 2024 Consumer Price Index inflation rate of 1.7%. [6]
Working towards retirement with True Potential.
If you’re a True Potential Wealth Management client and you’d like to discuss your investments or retirement plan, you can speak to one of our financial advisers or call our dedicated Relationship Management Team on 0191 500 9164. They are available 7am – 8pm weekdays, and 8am – 12pm on Saturdays.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. This material is not a personal recommendation or financial advice and the investments referred to may not be suitable for all investors. Pension eligibility and tax rules apply.
If you do not currently invest with True Potential and would like to find out how we can help you plan for your retirement and help you reach your long-term financial goals, contact one of our experts on 0191 625 0350 to get started.
True Potential Wealth Management is authorised and regulated by the Financial Conduct Authority. FRN 529810. Registered in England and Wales as a Limited Liability Partnership No. OC356611.
True Potential Investments LLP is authorised and regulated by the Financial Conduct Authority. FRN 527444. Registered in England and Wales as a Limited Liability Partnership No. OC356027.
Sources
[1] https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp
[2] https://commonslibrary.parliament.uk/research-briefings/cbp-9428/#:~:text=The%20annual%20rate%20of%20inflation,first%20time%20since%20July%202021.
[3] https://www.cnbc.com/2024/11/07/fed-rate-decision-november-2024.html
[4] https://ycharts.com/indicators/uk_inflation_rate#
[5] https://www.bankofengland.co.uk/explainers/why-are-interest-rates-in-the-uk-going-up
[6] https://www.gov.uk/government/publications/autumn-budget-2024/autumn-budget-2024-html
[7] Page 3:
https://assets.publishing.service.gov.uk/media/672232d010b0d582ee8c4905/Autumn_Budget_2024__web_accessible_.pdf
[8] https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/september2024
[9] https://moneyweek.com/economy/uk-economy/uk-inflation-consumer-price-index-release-dates
[10] https://commonslibrary.parliament.uk/research-briefings/cbp-7812/
[11] https://www.shawbrook.co.uk/savings/articles/how-does-interest-work/
