Base rate increase
On the 2nd August 2018 The Bank of England increased the base rate to 0.75% from 0.5%. This is the highest that the base rate has been since the financial crisis in 2008.
The Monetary Policy Committee voted 9-0 in favour of the change which was expected by the industry following the improvement of the UK’s economy in the second quarter of 2018 compared to the first quarter.
From a pension point of view this will have an impact on investments, especially on Small Self Administered Schemes (SSASs) that have taken advantage of using the Loanback facility for their sponsoring employer. If the loan agreement in place has a commercial interest rate over base the interest rate will rise and the amount needing to be repaid back will increase. From the SSAS point of view this is an advantage as more funds are being paid back to the pension fund.
For clients that are in Capped Drawdown the increase should mean the increase in gilt yields. What this means is that at their next pension income review, the amount of income per £1000 could increase. The gilt yield that is used is based on the confirmed 15 year rate published on the 15th of the previous month. Therefore for September 2018 the rate used will be published on the 15th August. It is also worth remembering that you do not have to wait for the next review and should the gilt yields increase reviews can be requested early from the pension provider.
Away from pensions the increase will mean that bond yields will start to rise. This is an advantage for new investors who wish to invest into bonds as the income produced should be higher. For individuals with variable mortgages, however, this will see mortgage interest rates increase by an extra 0.25%. For individuals with fixed term mortgages there will be no impact following the base rate interest.
