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.
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.
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.
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.
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.