Bank of England announces interest rate hike to 4.5% – with impact for pensioners | Personal Finance | Finance

Today, the Bank of England announced it has increased interest rates to 4.5 percent, the highest level since 2008.

In October 2008, several banks collapsed, sparking the global financial crisis.

The latest move from the central bank represents the 12th time in a row it has hiked its rate, with impacts for various people.

Colin Dyer, financial planning expert at abrdn, warned people are likely to feel a hit, as he said: “While forecasts show there should be a drop by the end of the year, this can only happen if inflation eases too.

“It’s a tricky balancing act which is causing a headache for the Bank of England, and the longer that inflation remains high, the longer most of us will feel the pinch.”

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However, an increase to interest rates is usually viewed as good news for annuities, as the base rate is passed on to pensioners.

Rio Stedford, financial planning expert at Quilter, said: “A rise in interest rates can have a positive effect on annuity rates, which are closely linked to Government bond yields.

“Higher interest rates generally lead to higher bond yields, which in turn lead to better annuity rates.

“This means that retirees who are about to purchase an annuity could receive a higher income throughout their retirement.”

But a high interest rate and high inflation environment could put more pressure on older people – especially for those with a limited income.

Retirement living standard are likely to be impacted, according to Dean Butler, Managing Director for Customer at Standard Life, who said: “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 percent 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.

“With the number of people unable to get on the property ladder as a result of high rents increasing, there’s the potential for this issue to worsen as current generations retire. It will be interesting to see if the recent announcement of the UK’s first 100 percent mortgage since the 2008 crash shakes up the market and helps address this.”

A difficult financial environment may also make it more likely people try to access their pension – dipping into their savings, and this is possible from the age of 55.

However, accessing pension money must be done carefully, to avoid challenges later down the line. 

Standard Life has highlighted people could run out of money later, may face high tax bills or have their state benefits impacted.

For those with a limited income, experts have generally encouraged them to look into the support they could secure in this time.

Mr Butler said: “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 calculator page on the Government website. Many benefits are hugely unclaimed, including Pension Credit.”

With another interest rate hike, combined with dramatic cuts to capital gains tax and the dividend allowance, pensions may be useful.

That is according to Alice Haine, personal finance analyst at Bestinvest, who said: “Options such as pensions make sense.

“Pension saving can reduce an income tax liability as it comes with the added benefit of tax relief applied to pension contributions at their marginal rate of income tax.”