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10 Aug 2016

How the interest rate cut will affect savings and pensions

With the Bank of England having recently announced a cut in interest rates to 0.25%, an article on the BBC News discussed how these changes will affect the average family´s mortgage, savings and pensions.

Mortgages

Data from the Office for National Statistics (ONS) suggests that the recent cut will reduce the average 25-year mortgage repayment by £22 per month, based on a home valued at £211,000 minus a 20% deposit.

This depends on the type of mortgage held. Those on Bank rate tracker mortgages (one in five mortgage holders) will see the most immediate benefit, while for those on standard variable rate schemes (29% of mortgage holders), it will be up to their lender to decide. Many are expected to pass the full cut on to households, but some may make a partial cut or indeed no change at all.

Savings

Bank rate cuts are generally regarded as being bad news for savers. The average interest rate on easy access savings accounts is likely to fall from 0.65% to 0.4%, meaning that savers will receive less annual gross interest than before the cut. However, cuts aren´t automatic and some providers change their returns even without a change to Bank rates; therefore, savers should act now to improve their returns.

Pensions

The purchase of government and corporate bonds announced alongside the rate cut is not expected to impact the state pension. However, it will put extra pressure on defined pension scheme deficits, causing businesses to either find ways to fill the gap or perhaps make these pensions less readily available.

It´s also bad news for those buying an annuity from their defined contribution pension. As Tom Selby – a senior analyst at AJ Bell – explains, “Insurers use government gilt yields to price annuities, so a cut in the base rate puts further downward pressure on UK gilt yields and, in turn, annuity prices.”

On a more positive note, the Bank´s decision has driven up share prices, meaning that investors and those paying into a private pension can expect to see a boost to the value of their investments.

Copyright M2 Bespoke 2016

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