The Bank of England (BofE) has increased interest rates from 3.5 per cent to 4 per cent today (2 February), although industry experts have suggested that this will have already been priced into pension schemes' plans.

This marks the tenth time in a row that the BofE has increased interest rates, with the Monetary Policy Committee (MPC) voting by a majority of seven to two to increase the bank rate by 0.5 percentage points.

Market experts had previously predicted a further increase, with Standard Life senior business development manager, Kieran Mistry, suggesting that this "largely anticipated” increase is therefore expected to have already been priced into schemes’ plans, and "shouldn’t significantly impact the much-improved funding position many have found themselves in".

He stated: “For trustees of those fortunate schemes, the focus will be on capitalising on improved funding levels, setting this year up to be a record for the pension risk transfer market, with volumes predicted to top £40bn.

“Even before adjusting for interest rates, this could make volumes of buy-ins and buyouts in 2023 the highest annual total to date.

"Many trustees will be turning their attention to scheme preparation and reviewing asset strategies for buy-out readiness as priorities ahead of de-risking activity.”

However, the impact on savers may be more mixed, as Royal London pension expert, Clare Moffat, arguing that while the interest rate doesn’t come as a surprise, it will be "unwelcome news for borrowers of all ages".

“Traditionally an interest rate hike would be welcomed by retirees keen to earn more interest on their savings," she explained. "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 per cent) admitting they’re worried about housing costs according to Royal London’s ‘cost-of-living’ research.”

Indeed, PensionBee director of public affairs, Becky O’Connor, warned that, for working people who are building up their pension pots who also have mortgages and other debts, higher interest rates can mean less spare cash to build up long-term wealth.

“So on top of rising prices, the higher cost of debt effectively diverts more resources to getting through tough times today, potentially leaving everyone with smaller pension pots later on," she stat-ed.

“Higher interest rates can also have implications for stock market performance, which pensions rely on to grow over the long term. Working people tend to have a higher proportion of their pensions invest-ed in equities, which are more likely to be negatively affected by higher interest rates."

However, O'Connor acknowledged that, if interest rate rises succeed in dampening down inflation, this could be "positive for pensions", as their value is more likely to grow in real terms, beating inflation, over the years.

She continued: “For those retired people drawing an income from their pension savings and choosing to keep some of their wealth in cash savings accounts, a higher interest rate on those savings will be welcome, even though the best buy rates still lag inflation.

“For retired people whose pensions remain invested in the stock market as they enter retirement, the impact of higher rates will depend on the proportion invested in equities versus the proportion in-vested in other asset classes, as higher interest rates can affect each differently.

“Higher interest rates can also boost annuity rates, which have been rising over recent months. These secure retirement income products that you buy with a pension pot are no longer necessarily the ‘poor value’ alternative to income drawdown and may increasingly be worth considering for retired people.”

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