With UK economic uncertainty rife, it’s perhaps no surprise that the Bank of England chose to cut the base interest rate to 4.25% today.
Decision makers round the table want to avoid activity grinding to a complete halt. By cutting borrowing costs, they’re hoping to relieve pressure on businesses, stimulate demand in the economy and shine a light towards a recovery.
Inflation might still be above target, but deflationary forces are at work which could have worrisome consequences for growth and are likely to act as a dampener on price rises.
The mighty service sector has shrunk for the first time in 18 months – as the tariff turmoil knocks business confidence, clients become more risk adverse and work orders reduce.
A recession rather than stubborn inflation is the ogre to avoid right now.
The niggling worry of high pay demands looks set to be fading into the background given that hirings have been scaled back by many companies.
There’s also the chance that an influx of cheaper Chinese-made goods could infiltrate the retail scene and land in virtual baskets.
Cut price giants Shein and Temu have increased ad spending in the UK and other parts of Europe, as the US looks like a much more hostile environment.
With worries about inflation evaporating and fears about growth rising, it looks like this rate cut could be followed by at least two or three more this year.
This article isn’t personal advice. Investments can rise and fall in value, so you could get back less than you invest. Ask for advice if you’re not sure what’s right for you.
What does the rate cut mean for savings?
This cut has largely been priced into fixed rates already.
Some easy access rates have come down in anticipation of the cut, but we can expect more movement in this market in the coming days.
Given that markets now expect roughly two or three more rate cuts for the remainder of the year, rates are likely to continue trending downwards in the months to come.
That means fixed-rate deals above 4.3% might not be around for much longer.
For savers, this means keeping an eye on your savings rates, and being prepared to switch.
You need to keep your emergency fund in easy-access savings, but these are also likely to drop. Some banks will be in more of a hurry to cut rates than others. So, you could more than double the rate from a pedestrian high street giant by shopping around among online banks and savings platforms.
For money you don’t need for longer, this is a decent opportunity to consider fixed-rate savings.
Fixed-rate deals let you lock in a rate for the duration – anywhere from a couple of months to five years. These have come down from their peak, but you can still make around 4.3% and as easy access deals get less generous, these deals will look increasingly attractive.
It means anyone who has money they don’t need for a fixed period of a few months or longer should consider tying it up for a better rate.
How to get great savings rates, without the hassle
An online savings platform, like Active Savings, means you can switch banks to find better rates all in one place, without spending lots of time shopping around yourself. Bear in mind that rates are added and withdrawn at any time.
Active Savings brings some great rates on the market from over 20 banking partners through one easy-to-use online account.
It also offers long and short-term fixed rates, as well as easy-access products.
Remember though, fixed-term products generally only allow access to your cash at maturity. Withdrawals from easy-access accounts usually take up to one working day.
What does the rate cut mean for annuities?
Despite the rate cut today, annuity incomes remain robust.
Latest data from HL’s annuity search engine shows a 65-year-old with £100,000 can get up to £7,881 per year from a single life level annuity with a five-year guarantee.
Today’s rate cut could see these incomes start to drift down in the coming months, especially as the expectation is that we’ll see more than one cut. But this is by no means certain.
If you’re in the market for a guaranteed income, it’s important not to panic and rush into making a decision.
Thinking of buying an annuity? – What you need to consider
If you’re thinking of annuitising, it’s important to do your research. Especially as once you buy one, you can’t just undo it.
So, don’t just accept the first quote you’re offered.
Different providers offer different rates and taking the time to look across the market could leave you thousands of pounds better off over the course of your retirement.
It's also important to include as much information about your health and lifestyle as possible as part of your annuity application.
If you suffer from a condition like diabetes or have had a stroke, then you could qualify for an enhanced annuity which will give you an increased income.
Even including data like how much you weigh, whether you drink, or if you’ve ever smoked could mean you get more from an annuity.
You can use an annuity search engine to get a sense of what’s on offer and make sure you get the best type of annuity for your needs.
Remember, annuity quotes are only guaranteed for a limited time. Rates can also change regularly and go up or down in future
You also don’t need to annuitise all your pension at once. You can annuitise in stages as you go through retirement.
This means you can annuitise to secure your essential needs and keep the rest of your pot in income drawdown where it has the opportunity to grow – although this isn’t guaranteed.
And as you annuitise more, you have the potential to benefit from higher annuity rates as you get older.
The government’s free Pension Wise service can help if you’re over 50 and need guidance about your retirement options. You should also get personalised financial advice if you need it.
The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.
Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 2122142).
