Rate rise helps savers

A KEY Treasury prediction for the UK economy in the event of Brexit is that borrowing costs would rise.

This would happen because – the Treasury argues – leaving the EU would make it harder for banks to borrow money and the cost of goods and services would rise.

An increase in borrowing costs would not just affect households – through increases in their mortgage payments and savings – but also the Government.

When the Government needs to raise money it does so by issuing a gilt, allowing insurance firms and other countries to invest at a certain rate of interest.

In turn insurance companies use these gilts to fund other investments, such as pensions. Gilts are seen as a good investment because Governments are usually guaranteed to repay the money lent to them. Pension funds typically buy a lot of gilts because they are safer long-term investments with steady returns.

Since the financial crisis, gilt yields have plunged as the Government has pumped money in to the economy and had to offer lower rates to attract investors.

This has crippled the returns of the pension funds that invest in them, and in some cases has caused the black holes in many schemes to increase. And it has caused a plunged in annuities – which pay a regular income for life on a pension pot – because gilts are used to fund these.

So rather than being a bad thing for pension funds, a rise in borrowing costs could cause a rise in annuity rates which would boost incomes for pensioners. It could also lead to better and more steady returns for many funds.