'Increasingly exposed': What the interest rate rise means for pensioners

The Bank of England has hiked interest rates for the 10th time in a row, heaping further pressure on households across the country.

The increase - designed to help keep inflation under control amid the cost of living crisis - saw the Bank increase the base rate from 3.5% to a 14-year high of 4%.

While the Bank has suggested the rate could now be at its peak, Thursday’s decision will particularly affect mortgage holders, especially those on variable rates who will have to pay more interest on their loan.

Another group of people impacted by the rate rise, to a different extent, is pensioners.

On the face of it, the Bank’s announcement is a positive for those pensioners who have purchased an annuity - which gives them a guaranteed annual income - as higher interest rates can boost annuity rates from a pension pot.

Helen Morrissey, senior pensions and retirement analyst at financial services company Hargreaves Lansdown, said following the rate rise: “Data from our annuity comparison tool show a 65-year-old with a £100,000 pension could get an income of up to £6,892 a year from a single life level annuity. This compares to £5,004 at the same time last year.”

However, Clare Moffat, pension expert at Royal London, warns that some pensioners will be left "increasingly exposed" to higher costs as a result of the interest rate hike.

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She pointed to the impact it will have on those still making housing payments; about 25% of over-65s in England don’t own their home outright.

Moffat also noted the current 10.5% inflation rate: a near 40-year high and five times the Bank’s target rate of 2%.

“An increase in interest rates heaps further pain on variable rate mortgage holders, those coming off a fixed rate deal who will see a big jump in costs, and many renters will also see increases passed on.

“Traditionally an interest rate hike would be welcomed by retirees keen to earn more interest on their savings. However, increasingly pensioners in the UK have to take into account the cost of housing from their retirement income, something along with high inflation that diminishes the value of their pension income.

“The impact of rising interest rates on personal finances is an issue that’s keeping retirees awake at night, with a fifth of retirees (19%) admitting [from Royal London’s own research] they’re worried about housing costs.”

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Rio Stedford, financial planning expert at Quilter, said that even for the majority who own their home outright, high inflation means pension payments don’t go as far.

“While many pensioners don't have much debt to speak of as they typically own their house outright, high inflation means that their regular pension payments may not cover their living expenses as they did before. Although the state pension has increased in line with inflation [at 10.1%], some pension plans may not keep pace with inflation, reducing the value of benefits over time. This can result in a lower standard of living and increased financial stress.

“If someone holds a significant amount of cash in their pension, then the interest rate hikes will help produce higher levels of growth, but the rates will not beat inflation.”