Changing perspectives – how interest rate dynamics impact wealth planning
The Bank of England has reduced its base rate by 0.25 having held rates at a 16-year high of 5.25 per cent since August last year. Despite this move, the feeling among economists is that further significant reductions will only materialise in the medium term. The reality of interest rates staying higher for longer is having powerful ripple effects across the economy; not least in the arena of wealth planning, where investment options and retirement choices are directly impacted. Jonathan Brown, Chartered Financial Planner at Isio Wealth Planning, explains why it matters.
Interest rates are high
It was only in June 2024 that the UK inflation rate met the Government’s target level of 2% and, although it will be seen as a major milestone in the economic travails of the past three years, it is not guaranteed to prompt continued rate cuts from the Bank of England over the coming months. Some members of the Bank’s Monetary Policy Committee hold concerns that underlying price pressures remain high, and that July’s inflation rate rise could be repeated later in the year.
With interest rates likely to remain at higher levels for longer, there are several considerations for those planning their wealth and those making retirement choices.
The first consideration is simply making sure you have bank accounts that pay a decent level of interest. Cash rates had already started to come down a little in preparation for central bank cuts, but whilst the interest rates on offer are still relatively high, it might be a good time to investigate fixed rate deposit accounts. The corollary of that, of course, is needing to complete self-assessment tax returns and paying the tax on the interest generated on such accounts.
Making the most of allowances
Your overall tax position can be improved by ensuring that you are making the most of your annual allowances. Simple things like moving money into an ISA for the tax year or switching money with your spouse depending on who is the higher earner, can ensure you are reducing your tax liabilities.
Navigating higher costs
Higher interest rates also increase the cost of borrowing, and for those at the accumulation stage, this might dramatically impact the amount of available cash to save and invest.
Longer-term mortgages, higher costs of borrowing and the reduced availability of cash for savings may translate into the prospect of lower retirement pots and the need to work for longer.
Impacting retirement options
For those approaching retirement age with mortgage debt outstanding, higher interest rates also present a challenge. Some may be considering accessing a portion of their tax-free cash from their pension to help clear some of their mortgage burden, whilst others may be recalibrating their retirement income needs because the cost of servicing their mortgage has substantially increased.
We’ve also seen a number of clients with larger mortgages, who may have been planning on equity release, be challenged by the mortgage rate environment. Whereas at one point you could lock in and get rates for life at 3.5%, that’s now gone and – according to the Equity Release Council’s data - you’re now potentially paying over 6% on average for equity release.
The importance of education
Wherever you are in your wealth planning journey, the importance of understanding your options is of paramount importance. When I sit down with a new client, I explain that one of my jobs is to provide education to help them make informed decisions. That education doesn't stop after the first meeting. It's a continued dialogue because markets change; interest rates change; pension tax legislation is always changing. For many, the best wealth planning is enhanced by regular reviews – re-assessing circumstances, goals, concerns and the impact of economic and regulatory changes. A proper in-depth discussion that is of value to you. It’s based on an understanding of how market cycles work and the importance of making informed decisions throughout them, but also being very conscious of your client’s emotional ties and their own personal goals.
Jonathan Brown is a Chartered Financial Planner at Isio Wealth.
+44203 727 9841
Alongside our team of trusted advisers, Jonathan can assist with all aspects of wealth planning - delivering a financial plan that best fits your personal circumstances and financial goals. He can also help you regularly review progress against your goals.
This communication has been compiled by Isio Wealth Planning (IWP) as a general information summary and is based on its understanding of events as at the date of publication, which may be subject to change. It is not to be relied upon for investment or financial decisions and is not a substitute for professional advice (including for legal, investment or tax advice) on specific circumstances. IWP accepts no liability for errors or omissions or reliance on any statement or opinion. Where we have relied upon data provided by third parties, reasonable care has been taken to assess its accuracy however we provide no guarantee and accept no liability in respect of any errors made by any third party.
