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UK pensions affected by Bank of England rate hike: what to do?

The decision by the Bank of England (BoE) to increase its benchmark interest rate for the first time in more than a decade, caused quite a stir, even though it had been widely anticipated. As usual there will be winners and losers.

In reaction, financial experts and other commentators focused much on the implied pros and cons for mortgage holders, savers and borrowers among others. However, for holders of UK pensions, there may also be specific negative consequences, unless they act immediately to mitigate or neutralise the effects.


Unfamiliar terrain for manyUK Pension Rate Hike

With British interest rates at historically low levels for the past decade, and seen against special measures adopted to provide a cushion against Brexit fallout, the BoE’s decision to increase the base rate from 0.25 percent to 0.5 percent was met with mixed reaction. The BoE said it had no choice, given the high inflation level.

It is perhaps less the size of the increase than the unfamiliarity that caused so much concern. The increase itself at a quarter percent was relatively small, although its new level meant it doubled. But over the past ten years the idea of an increase had faded from the collective British memory. As many as 8-million Britons have never seen an interest rate hike in their adult lives, and therefore this increase came as something of a shock to them.

Many fund and asset managers have never before had to deal with a rise in interest rates either. The same goes for up to 42% of mortgage-holders in the UK, and there is concern over how well prepared they may be. First-time home buyers will also now face a tougher market to enter into.

The BoE’s rate decision will affect millions of UK households. It has been calculated that the rate hike will add £22 a month to the costs of servicing the average variable rate mortgage, but because of the growing popularity of fixed-rate home loans, initially only 43% of home buyers will be affected.

Among the winners will be some 45-million people with savings accounts, especially retired people who save much of their money in deposit accounts. They will be relieved that their savings will earn somewhat better returns now. Among the losers will be borrowers who will now have to pay more. And as mentioned, the overall retirement and pension environment will also be affected, both positively and negatively.


The pension and retirement landscape

So just how will it affect the pensions and retirement landscape? Anyone with a UK pension, whether living in Britain, South Africa or elsewhere, should seriously take note of the interest rate change.

As mentioned, for pensioners with savings it is good news. And those wanting to buy a retirement annuity will also stand to benefit as annuity rates follow the yields, or interest rates, on long-dated government bonds, also known as gilts. As the base rate rises, so do yields, thus providing annuities with better value.

For those at risk from Britain’s pension funds deficit crisis, the increase plus more to follow could also be relatively good news. The pension deficit has already passed the £430-billion mark, with more than 85% of UK pension schemes currently in deficit. However, there is significant optimism that the increased base rate will now most likely feed through into lowering company pension scheme deficits. But the crisis may nonetheless yet be far from over.

The bad news is that UK pension-holders who have a defined benefit scheme or final salary scheme may be adversely affected by the rate hike.

In this case also, the link between rising interest rates and gilt and bond yields affects the liabilities on final salary schemes and transfer values. Values of defined benefit schemes or final salary schemes of pension funds invested in gilts, are likely to fall. The amount of money your scheme will offer you to leave it, is likely to decrease as the rate hike is expected to drive down defined benefit pension transfers.

If you recently obtained a valuation of your pension scheme or never obtained one before, and you are living outside the UK, now is the time to find out what other options are available to you. The best way to go about it is to find out what your transfer value is at present. Or if you recently obtained a transfer value that has not yet expired, you have a very short window period to decide what to do. This is where Carrick can assist you.

With our established expertise in the field of retirement planning and pensions, we’re able to give you the best advice possible. By seeking expert advice regarding your pension planning, you can save yourself money and worry… a fact made even more relevant by the BoE’s interest rate hike.

As Sir Steve Webb, director of policy at Royal London, has warned, you should act “as a matter of urgency, as transfer values are unlikely to remain at today’s very high levels”.

Don’t delay. With limited time available to consider other options (like a QNUPS or QROPS) to protect your pension’s value, contact us today at

Carrick Wealth is a registered South African financial services provider specialising in South African and international financial planning. Carrick is also licensed in Zimbabwe and Botswana, and holds three global licences in Mauritius. Carrick at all times maintains its independence with regard to product providers and asset managers, and provides bespoke risk assessment, financial planning and other services to high net worth individuals (HNWI). Through partnerships with industry leaders in the fields of foreign exchange, tax, international property, offshore bank accounts, trusts, wills and estate planning, Carrick is able to provide the highest levels of service for your financial planning and investment requirements, both offshore and domestic.

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