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Interest rates and inflation – what it means for your savings, debts and annuities

We explore what rising interest rates and inflation could mean for your savings, debt and annuities and what you can do.

Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 2 years old

It was correct at the time of publishing. Our views and any references to tax, investment, and pension rules may have changed since then.


All information is correct as at 31 December 2022 unless otherwise stated.


After more than a decade of record low interest rates, 2022 was marked by rapidly rising rates as the Bank of England (BoE) stepped in to tackle soaring inflation.

But with inflationary pressures expected to ease as we head through 2023, many might be left wondering what the impact will be on the pace of interest rate increases. When will rates ‘normalise’ and what does this mean for our long-term finances?

More pertinently perhaps is how we navigate the current environment of higher interest rates and what this means for our savings, debts and retirement decisions.

Getting the most from your cash

For some, savings money is the only way to make ends meet. But for others, it’s a chance to build savings before life gets even tougher. In September 2022, UK savers squirrelled away an extra £8.9bn – well over the previous six months’ average of £5.3bn. This is based on both deposits and NS&I (National Savings & Investments) accounts.

A fifth of people leave at least some of this money in their current account. More than half shovel it into an easy access account and half stick with the same bank as their current account. But this is a missed opportunity.

This money shouldn’t languish in a high street savings account, where it could be earning 0.5% or less, when there are better rates on offer elsewhere. It’s essential to shop around. Meanwhile, any cash you won’t need for at least a year could be tied up for the period that makes the most sense for your finances in return for a better rate.

If you need help with this, have a look at our Active Savings account. You can manage your savings in one place, giving you access to competitive interest rates from partner banks and building societies through one online account.

It’s free to use. We charge our banking partners, not you, to offer rates that differ to the high street.

Remember, as a rule of thumb when you’re working you should have three to six months’ worth of essential expenses in an easy access account as an emergency savings safety net. When you’re retired, this rises to one to three years’ worth.

Explore Active Savings

Navigating debt

The soaring cost of living has forced lots of us to take on more debt. We borrowed £800 million more in consumer credit in October 2022, including £400 million on credit cards. Fears of more interest rate increases, further pushing up repayments, might prompt more people to rein in their spending, especially as the prospect of a recession looms.

It’s an issue that affects all parts of society. Our savings and resilience comparison tool shows wealthier people have more access to credit than those who are less well-off, but they could run into trouble.

Only 12.4% of the highest-earning households are resilient when it comes to future debt repayments compared to 63.8% of the lowest-earning households. While they’re on top of their repayments right now, the prospect of upcoming job losses could tip more people into troubled territory.

Help controlling your debt

Annuities – time to lock in a favourable rate?

An annuity is a retirement product that allows you to swap some, or all, of your pension savings for a regular income that’s guaranteed to be paid for the rest of your life. How much you get will depend on the size of the pension you use, your age and health, the options you choose (for example if you want to link it to inflation) and the rates available at the time you buy.

After years in the doldrums, the increasing interest rate environment has revived the fortunes of the annuity market with rates rising rapidly during 2022.

The expectation of future interest rate rises during 2023 could further support annuities and prompt more people looking for a guaranteed income to include them within their retirement income plan.

Equally, the prospect of increasing rates could cause people to hesitate buying an annuity as they don’t want to lock themselves into a rate that could rise further. However, it’s worth remembering that you don’t have to annuitise your whole pension at once.

Buying several smaller annuities throughout retirement means you can potentially benefit from higher rates as you age. You could also get a further uplift if you develop a condition that qualifies you for an enhanced annuity.

There are several providers operating in the annuity market, and it’s vital you shop around to get the best rate.

There’s no obligation to buy an annuity with the quote, but they’re only guaranteed for a limited period and rates will go up and down in future.

Learn more about annuities

It can help you compare quotes from five of the UK’s leading annuity providers. Your quote will show you exactly how much income you could get each year based on the annuity options you choose.

Use our annuity calculator

Why is inflation expected to fall in the middle of 2023?

Here are three reasons why the Bank of England (BoE) expects inflation in the UK to fall sharply from the middle of 2023:

1. The price of energy won’t continue to rise so quickly. The government has introduced a scheme that caps energy bills for households and businesses for six months.

2. The BoE don’t expect the price of imported goods to rise so fast. That’s because some of the production difficulties businesses have faced are starting to ease.

3. The BoE expects there to be less demand for goods and services in the UK. That should mean the price of many things won’t rise as quickly as they have done.

Source: Bank of England, November 2022.

What’s next for inflation in 2023?

READ MORE

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Written by
Helen-Morrissey
Helen Morrissey
Head of Retirement Analysis

Helen raises awareness of key retirement issues to help people build their resilience as they move towards their later life.

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Article history
Published: 8th February 2023