Bank of England raises rates to 5.25%

Interest rates have reached a 15-year high today, as the Bank of England raised them for the 14 time in a row, to 5.25 percent. 

Colleen McHugh, chief investment officer of Wealthify said June’s softer than anticipated inflation numbers allowed the Bank of England to side with the doves with a 25bps, rather than a 50bps, rate hike. She said: “June’s surprise 50bps rate rise has provided the BoE with a safety blanket of sorts and facilitated the lower quantum nudge that we see today. And if the data supports, we should expect to see a couple of further 25bps increases later this year.” 

What does this mean for pension schemes?

Defined contribution (DC) schemes will want to reflect carefully on their communication strategy, as many members will be experiencing financial stress. This will be especially pronounced as fixed term mortgage deals end and people are remortgaging in a new reality.

Search terms like “mortgage help” have increased by 1,366 per cent in the last week, according to mortgage broker L&C Mortgages. Six in ten mortgage holders are worried about making their repayments, according to Opinium research.

There is no sign of an uptick in auto-enrolment opt-out rates yet, but industry commentators are mixed on whether this will change as savers look at every aspect of their spending. AJ Bell research carried out in autumn 2022 showed that a third of workers could opt out of their workplace pension scheme in response to rising living costs.

Older savers - who are more likely to have an entitlement to defined benefit (DB) pension savings - will not be spared the pain, either. As Dean Butler, managing director for customer at Standard Life, says: “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.”

Interest rate and annuities

Rosie Hooper, chartered financial planner at Quilter said the increase in interest rates may benefit annuity rates, as they have a direct connection to government bond yields. She added: “Higher interest rates typically result in elevated bond yields, which consequently improve annuity rates. This suggests that retirees on the brink of acquiring an annuity could enjoy a superior income throughout their retirement phase. Those nearing their retirement should vigilantly track interest rates and bond yields, and seek financial advice to help plot the optimal retirement course.”