Borrowers hit by rate rises as savers cash in

RISING interest rates are creating both winners and losers, as returns from annuities and savings accounts surge to 15-year highs, while mortgage borrowers see their monthly repayments rocket.

Inflation stayed stubbornly high in April at 8.7 per cent and this could force the Bank of England to hike interest rates to at least five or six per cent, before prices are checked.

Sales of annuities, products which provide a guaranteed income for life, surged 22 per cent to £1.2billion during the first three months of this year, according to new figures from the Association of British Insurers.

Annuity rates are linked to interest rates, the ABI said, and the sharp rise in sales reflects the higher income they now pay. More pensioners are now buying annuities than at any time since 2015’s pension freedom reforms scrapped the obligation to buy them at retirement.

ABI director of long-term savings policy Yvonne Braun said: “It’s great to see more people taking advantage of the protection annuities have to offer, especially given the current favourable rates.”

A healthy 65-year-old with £100,000 of pension can now buy a single life level annuity paying income of £6,842 a year, latest Hargreaves Lansdown figures show. That is up from just £4,700 five years ago.

A smoker could get an even higher income of £7,619, reflecting their lower life expectancy, as the annuity should not have to pay out for as long.

Growing numbers are buying escalating annuities, where the income increases every year to combat inflation.

Savings rates are on the up with app-based account Chip paying 3.82 per cent on instant access, while Shawbrook Bank offers a fixed-rate bond paying 5.06 per cent for one year.

Last May, the average fixed-rate bond paid just 1.32 per cent, said Lucinda O’Brien, Money.co.uk personal finance expert: “That’s a big increase so move your money if it is earning little or no interest.” Savings rates may be climbing but they are still well below the inflation rate, meaning cash is being eroded in real terms, while many mortgage borrowers face growing difficulties.

One in 10 homeowners are approaching retirement with an unpaid mortgage as rates hit the highest levels since 2008 and are expected to rise even further, said Alistair McQueen, head of savings and retirement at Aviva: “Millions may be having to rethink their retirement plans. Consolidating debt, paying off high-interest loans or switching to a cheaper rate are options.”

The Money Charity chief executive Michelle Highman said that there is a crisis brewing as mortgages become unaffordable for new and existing borrowers. She said: “Homeowners have been impacted by rising interest rates, in some cases paying up to twice as much as before.”

Annuity buyers and savers are likely to benefit further as inflation and interest rates continue to rise, but the pressure is growing on borrowers.