It’s been a stormy week for personal finance. Financial markets were shaken by the collapse of US banks and fears that the contagion could spread. The Bank of England then raised interest rates again on Thursday to a 14-year high.
And inflation – which appeared to be declining – slowly picked up again and remains firmly in the double digits. This economic turmoil is having a tangible impact on all of us – on everything from the value of our savings and the size of our household bills to the lifestyle we can afford to retire.
Wealth & Personal Finance explains here what it means for you and your money – and looks at what lies ahead on the horizon.
For savers, turmoil can be a silver lining…
In a week filled with disturbing news, savers enjoyed a well-earned silver lining.
They should be one of the biggest direct beneficiaries of the Bank of England’s latest rate hike. The base rate was raised from 4 percent to 4.25 percent, the 11th consecutive rate hike since the Bank of England began raising rates in December 2021.
In theory, the savings interest rate should rise along with the base interest rate. That’s because savings providers use it as a rough yardstick to set their own rates. However, many providers are slow to pass on increases.
Stormy times: We break down what the current climate means for you and your money – and look at what may be waiting on the horizon
Some, including Coventry and Yorkshire Building Societies, Chase Bank and Atom Bank, raised savings rates within minutes of the Bank of England’s announcement. Others, such as Barclays and Lloyds, told Wealth & Personal Finance they are still reviewing their rates in light of that.
Rachel Springall, financial expert at interest rate monitor Moneyfacts, says: “Not every savings provider will pass on the rise in base rates, so it’s crucial for savers to stop and switch if they find better returns elsewhere.”
In general, challenger banks and building societies offer much higher rates on easily accessible accounts than most major banks. The best rate on an easily accessible account is currently 3.4 percent, offered by savings provider Chip.
If you don’t need your money for a while, you can opt for a fixed interest account that offers a more favorable rate. Al Rayan Bank offers 4.5 percent if you commit for 12 months; Tandem has 4.6 percent if you commit for five years. Savers who want to build up a tax-free savings account can consider an Individual Savings Account (ISA). The rates on these are broadly similar to traditional savings accounts – the main difference being that you can save up to £20,000 a year without paying tax on the interest earned.
The good news on interest rates last week was tempered by the surprise revelation that inflation is still rising – now at 10.4 percent. That means if you had £100 in cash a year ago, it would have the purchasing power of £89.60 today.
Using high-paying savings accounts can help counteract the impact of inflation, but even if you choose the most competitive ones, the value of your savings will still fall in real terms. The Bank of England forecasts that inflation will fall sharply towards the end of the year.
… But borrowers face rising mortgage payments
About 1.6 million homeowners with tracker or variable rate mortgages will already have seen their payments rise as a result of the rate increase. For someone with an outstanding mortgage of € 250,000, the interest rate increase amounts to € 35 per month extra, according to figures from wealth platform AJ Bell. A borrower with a £400,000 mortgage would pay a further £56 a month – or £672 a year.
Most borrowers have fixed-rate mortgages, so they won’t see an impact on their monthly payments until they re-mortgage.
But about 400,000 people have firm deals that expire in the next three months and could get a shock. According to Moneyfacts, the average two-year fixed-rate mortgage is now 5.32 percent. This is more than double from two years ago, when they averaged 2.57 percent. However, the rates are slightly lower than the 5.44 percent of just a month ago.
The worst of the pain may be over for borrowers, though it’s unlikely they’ll enjoy rock bottom rates again anytime soon. The Bank of England is not expected to make much more rate hikes in the foreseeable future as inflation is expected to fall significantly this year. Lenders don’t even necessarily need to raise rates as a result of last week’s base rate hike, as many had already seen it coming and priced it into their loans. Nationwide even cut mortgage rates after the Bank of England announcement. However, a group of homeowners really need to watch out. Those who are about to get rid of a fixed rate deal should arrange a new one as soon as possible.
That’s because when you switch from a fixed-rate deal, your lender sticks you with their standard variable rate. These have reached over 7 percent, meaning someone coming off a two-year fixed period now could see their rate rise from 2.57 percent to 7.12 percent.
For someone with a mortgage of € 400,000, this is an increase of more than € 1,000 per month.
You can take out a new mortgage six months before your current one expires. Planning in advance should ensure a seamless transition. Myron Jobson, senior personal finance analyst at investment platform Interactive Investor, says, “You’re not tied into mortgage contracts until you sign on the dotted line, so if you find a better deal in the meantime, you can drop it.”
Household bills are still rising
Most economic forecasters had incorrectly predicted that inflation would fall further in February. But anyone who has walked the aisles of the supermarket or the high street lately will probably not be surprised to see inflation rising again.
Cash-strapped households are still seeing the cost of nearly all goods and services rise, yet few are seeing wage increases to match.
While inflation rose 10.4 percent overall, dig into the details and you’ll find huge variation. For example, the costs of milk, cheese and eggs rose by 30.8 percent; oils and fats at 32.1 percent; flights by 16.8 percent; and pet products by 14.6 percent.
Meanwhile, sports equipment and used cars fell in price. That means that depending on how you spend, you may experience significantly higher – or lower – personal inflation than the average.
Insurance is one area in particular that has seen big price increases, last week’s inflation data confirmed. Car insurance in particular rose by 33.2 percent, home contents and health insurance rose by 6.4 and 6.2 percent respectively.
Insurers state that premiums have risen mainly due to rising material and labor costs. For example, if your home was damaged and needed repair, the cost of the wood, bricks, hardware, and labor is significantly higher today than it was a year ago. Similarly, if your car has been written off, it would cost more this year than it did last year to replace it.
So what’s next? The Bank of England forecasts that inflation will fall sharply in the second half of this year. It believes the extension of the energy price ceiling announced by Chancellor Jeremy Hunt in the Spring Budget should help.
This puts a cap on the average utility bill of £2,500 for the next three months. Without the extension, bills would have risen to £3,280 on average. Falling petrol prices should also ease the pressure.
However, prices are not predicted to fall – they are only expected to stop rising just as quickly.
Relief: Gasoline prices have fallen
Inflation hits retirees… but annuities are rising
RISING inflation can be particularly damaging to retirees. That’s because working people can increase their income by negotiating a raise, working more hours or changing jobs, while retirees usually live on a fixed income.
Data released last week by the Department for Work and Pensions showed pensioners’ incomes fell in real terms last year, from £376 to £349 a week.
Now that the state pension will be increased by 10.1 percent on April 6, this should provide some relief for the sky-high inflation.
Those eligible for the full new state pension will receive £203.85 per week, an increase from £185.15. Those who reached state pension age before April 2016 and therefore have the old state pension age will receive £156.20 instead of £141.85.
Last week’s interest rate hike will probably be good news for people about to retire and want to buy an annuity.
An annuity is a product that allows you to take your retirement pot and turn it into a lifetime income.
Having a £100,000 nest egg could buy you an annuity income of £5,888 for life, according to analysis by William Burrows, a financial advisor who leads the Annuity Project. This could rise to £6,000 if rates rise again.
A year ago, the same annuity would have paid about £1,500 a year less. Burrows believes this means it could be a good time to consider an annuity. The figures are for a couple aged 65 and 60 who buy an annuity that does not grow with inflation.
Invest for the long term and keep your spirits up
With so much dramatic financial news, it can be difficult for investors to know what to do.
Putting your fingers in your ears and just moving on can feel counterintuitive. But investors should remember that they are investing for the long term and not worry too much about short term volatility.
Ensure a balanced portfolio that is not too dependent on the ups and downs of a company, sector or region.
And check that you’re keeping costs under control by making sure you’re getting good value from your investment platform or pension provider. Then just drown out the noise.
If you’re concerned about investing in a time of such market turbulence, invest a little often rather than all at once. That way you don’t risk investing all your money just before a market drop.
Becky O’Connor, director of public affairs at pension provider PensionBee, says: “It’s important to focus on control over what you can control, including increasing your contributions if possible and making sure your money is properly invested for your financial goals.” , whether that is long-term growth or income.”
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