The Bank of England's decision to cut interest rates from 0.5 per cent to 0.25 per cent marks the first interest-rate change in over seven years and is the result of the market uncertainty stemming from the EU referendum vote. The Bank has dropped the rate in an attempt to stimulate the economy and will be welcomed by businesses, but what does this mean for your finances?
The interest-rate cut is not only bad news for those pensioners relying on their savings to generate an income, but also for those on the verge of retirement who may be looking to secure an income through an annuity, as it's likely to add extra downward pressure on annuity rates at a time when they are already at record lows. The greater demand for gilts could see yields fall further, and since these are used to back annuities, it seems inevitable that annuity rates will take a hit.
Never has it been so important to shop around for your annuity
An interest-rate cut will also have an adverse impact on the already precarious funding position facing most defined-benefit schemes, as lower gilt yields will increase pension liabilities. Employers will need to look at ways of addressing the greater pension deficits that this is likely to create.
Tip: If you're about to retire, seeking advice on your choices is essential. Never has there been a more vital time to shop around for the best annuity deals.
Today is a bad day to be a saver; savings rates have already plummeted to record lows, so a cut to interest rates is only going to increase savers' pain.
Rates have tumbled since the last base-rate change; for example, the average easy-access account has fallen from 0.94 per cent in March 2009 to 0.55 per cent today, while the average two-year fixed-rate bond fell from 2.83 per cent to 1.31 per cent over the same period.
The base-rate cut does not necessarily mean that providers will pass on the reduction to savers, but seeing as rates are already dropping, this latest change will give them yet another opportunity to cut their rates. Anyone considering switching deals will therefore need to do so sooner rather than later.
Tip: Regular savers are a good way to earn up to 6 per cent AER if you're paying into your savings every month. They only last a year though and you'll need to move money elsewhere. Also look at high-interest current accounts. You'll be able to earn up to 5 per cent AER and can combine a number of accounts to get a decent return for all your money, providing you pay enough into each account each month (although there's nothing to stop you taking it straight out again).
Bargain holidays may be a thing of the past, for the near future at least.
An interest-rate cut usually results in a weaker pound which means you'll get less foreign currency for your money. However, if you do have any Euros left from your last trip, you might be able to make a small profit on what you exchanged them for.
A weaker pound will also see the cost of imports rise, which means you'll likely see higher prices for foreign goods in shops.
Tip: If you are heading overseas one of the most cost-effective ways to spend could be one of the many specialist foreign-use credit cards on the market. These can offer fee-free foreign spending with bureaux-beating exchange rates.
Loans and credit cards
A rate cut should mean cheaper borrowing for consumers. However, borrowing rates are already incredibly low so it may take time for the Bank of England’s announcement to have an impact on the best buy tables.
That said, the real action in the credit-card space is on introductory 0 per cent periods on both purchases and balance transfers; with some extremely long periods available to consumers at the moment. In some cases customers can have up to 41 months 0 per cent on balance transfers, making a potential cut to card APR less of an issue.
While there are good deals available, the best rates will still be reserved for customers with a good credit history and new regulation means that banks are tougher than ever when it comes to affordability and credit checks.
Tip: Using a comparison site can help you get an idea of the cards you could be eligible for, without hurting your credit rating.
The only people guaranteed to benefit are those on tracker mortgages. It's likely to save you about £35 a month (£420 a year) on a 25-year £170,000 mortgages.
If your mortgage payments go down, the best course of action will be to keep paying the same amount so you known down your capital.
Tip: If you're on your lender's variable rate, which averages 4.4 per cent across the 10 big banks, you're likely to be paying far too much for your mortgage already. Switch to a cheap fixed-rate deal to guarantee rock- bottom payments for the next few years. Consider offsetting your mortgage if you've got a house and savings. An offset mortgage gives you a way to pay interest on less of your mortgage so your repayments and your savings work harder.
- For more money-saving tips, pick up the latest copy of Yours magazine