Interest rates for savers are set to rise following the Bank of England’s decision to increase the base rate from 0.5 per cent to 0.75 per cent.
After months of speculation, the Bank of England’s Monetary Policy Committee (MPC) voted to raise the base rate for the first time since November 2017.
The news has been welcomed by personal finance experts across the UK, who believe that banks will be quick to pass on the higher interest rates to long-term savers with instant access accounts and cash ISAs.
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“Rising interest rates will be welcomed by retired people who often have a large proportion of their savings in deposit accounts,” said Vince Smith-Hughes, retirement expert at Prudential.
“Rising inflation has eroded their retirement income as deposit accounts fail to keep pace with inflation. The rise in interest rates will hopefully see better returns from savings accounts. Using the right wrappers to minimise tax is also important, as is using any tax allowances that are available.”
However, others have warned that the rate rise will be felt keenly by those living in debt.
“While an interest rate rise is positive news for people living on their savings income, or holding pensions and investments, it may prove to be the tipping point for those in financial difficulty or struggling with debt,” said Richard Haymes, head of financial difficulties at TDX Group.
“Individual Voluntary Arrangements (IVAs) have reached record levels and we expect the rate of monthly IVAs and Trust Deeds to grow by around 17 per cent this year. A rise in interest rates will make it much harder for people in these arrangements, and there’s a risk they’ll default on their strict requirements.”
The MPC meets once a quarter to review the base rate for the Bank of England. However, in the past nine years the rate has remained at either 0.5 per cent or 0.25 per cent – a historic low. Today’s rate hike brings the base rate above 0.5 per cent for the first time since February 2009.
“The decision to increase the base rate means there is light at the end of the tunnel for UK savers who have faced a lost decade in the low interest rate environment, which has done little to help them build nest eggs for holidays, homes or retirement,” said Charles Haresnape, chief executive of Gatehouse Bank. “Savers can now look forward to returns from savings accounts climbing, but this is unlikely to happen overnight.
“Whilst it is likely to be a long time before rates ever return to what anyone over the age of 40 considers ‘normal’, it’s important that people understand the positive impact that getting into the habit of savings can have, helping them to make major purchases or as a safety net for unforeseen financial emergencies.”
“Speculation over a rate rise has finally come to an end,” said Alistair Wilson, head of retail platform strategy at Zurich.
“Continued low interest rates have left savers struggling to secure a return on their cash, while inflation eats away at the other side. For retirees relying on interest to supplement their income, rates are finally heading in the right direction, but they still need to rise further to make a significant difference. It could also take months before savers actually see the impact of today’s hike, as with last November’s quarter of a percent increase, which has only resulted in an average 0.07 per cent rise on easy access accounts.
“Consumers should still consider what else they can do to help their savings grow. Feeding a small amount each month into a stocks and shares ISA or a pension fund is a sensible way to build a healthy sum over the years, while also protecting your savings as you go.”
Also published on Medium.