We are all affected by interest rates, be it bank deposit rates, mortgage rates and gilt yields, in different ways. Rising bank interest rates are good for savers but poor for mortgage holders who are not on a fixed rate. Rising gilt yields are good for annuity purchase but poor for investors. Here, our Managing Director Phil McGovern explains why the different types of interest rates affect different clients.

Bank Interest Rates

Currently the Bank of England Base Rates is 4.50%. Not so long ago the base rate was 0.10% so we can see how quickly things have changed.

All through last year the ‘experts’ have been predicting that interest rates will peak at 4.5% and will start to fall afterwards as inflation will be under control. Sadly, inflation is stubbornly high, and the market now predicts that interest rates may rise to 5.5% before coming back fairly quickly.

The positive of this is that savings rates have risen quite sharply.

An Easy Access account can be as high as 3.88% and the highest 1-year term account is 5.26%. (as at 6th June 2023). But don’t forget that compensation levels for banks and building societies is only £85,000. National Savings & Investments (NS&I) is backed by the Government and offers full protection, and the Growth Bond is a 1 year account paying 4.00% gross.

We have recently signed up with Insignis Cash Management Service where they spread your cash savings between many institutions so that you maximise the interest rates and minimise the risk. They do all the heavy lifting as you are only required to provide details once to open the account – you can then access over 30 banks at a click of a button. It has proved very successful with clients so if you are interested, please speak to your adviser.

Generally speaking, in a pension you cannot get the same interest rate on cash that you would get as an individual, they tend to be lower. Some accrue interest on cash reserves held in the portfolio, and others allow you to invest into savings/deposit accounts (such as NS&I Growth Bond at 4% gross).

Mortgage Rates

Looking around today the best 2 year fix I have seen is 4.25% and the best 5 year fix is 4.03% which is a huge spike since the start of last year when 5 year fixes were below 2%. If you are looking for mortgage advice in this difficult market you can contact Rob Chapman, our independent mortgage broker through the office.

Lastly, gilt yields. This is the rate that the markets lend to UK plc and the chart below shows the interest rates (yields) on UK Government 10 year gilts. Currently the yields are back to levels we were at since the disastrous budget of Truss and Kwarteng in September last year.

(Chart below)

 

This means that annuity rates are picking up again, which is good for people looking to fix their income for life at a decent rate. However, its not good for investors in portfolios that have large holdings in gilts as their capital falls when the yields on gilts increases.

The rise in gilt yields is down to continued raised levels of inflation and the markets view of where interest rates will go to. Having said that I would expect gilt yields to fall fairly soon, so there may be an opportunity to fix your pension income with some or all of your pension money while you can. Again speak to your adviser for further details.

Inform, Educate , Inspire

Phil J McGovern FPFS

Chartered Financial Planner