What Are Interest Rates and How Do They Work?
Pension Options Direct Blog
russ.myers@padfs.co.uk
February 17, 2022
What Are Interest Rates and How Do They Work?
Making interest rates interesting
Are you a saver or a borrower? Saving money is always beneficial, and borrowing money is always handy in times of need or when buying a house. An interest rate is simply the percentage a lender or creditor will charge you or credit you for a lump sum. The more money you save, the more you will earn through compound interest.
Borrowing money is not free to do (we can dream!) If you are borrowing money, your interest rate will be based on what your lender expects you to pay for borrowing that money. An interest rate is dependent on the lump sum of money you wish to borrow. Typically, the higher the amount of money, the higher the interest paid but usually the lower the interest rate. An interest rate is not a fixed sum.
On the flip side, having a savings account could have a more positive impact on your interest! From personal savings accounts to pensions – you could be seeing your savings rise at a higher rate than expected when interest rates rise in the UK.
What Are Interest Rates and How Do They Work?
What is APY?
An annual percentage yield, also known as APY, is based on compound interest. To put it simply: compound interest is calculated by how much money is in your savings account. The amount of compound interest depends on the initial sum of money, paired with your creditors’ interest percentage rate. The higher your figure is, the higher compound interest you see in return. Essentially, you can earn more money from your savings with the right knowledge!
What Are Interest Rates and How Do They Work?
What is APR?
An annual percentage rate, also known as APR, is the agreed interest percentage on an annual basis. The higher the rate the more you will pay in interest, therefore analysing the loan and APR rates on offer can save you significant amounts of money.
What Are Interest Rates and How Do They Work?
Your Eligibility for a Loan
Determining your eligibility lenders will look at:
- – Your credit history and credit score
- – How much money you want to borrow
- – The type of loan you are applying for (Mortgages, bank loans etc)
- – Your employment history and income
What Are Interest Rates and How Do They Work?
The Base Rate
The base rate is discussed and reviewed roughly 8 times a year. A base rate is an interest rate that the Bank of England set and is used by banks and financial lenders to base their interest rates on. If you are borrowing money you will pay normally, the base rate plus an uplift and if you are saving money you will normally receive less than the base rate.
If the base rate decreases, you would pay less interest on your borrowed money, however earn less on your savings. The same principle applies if the base rate rises. You’d pay more interest, but in return you’d gain more interest on your savings.
What Are Interest Rates and How Do They Work?
How do interest rates affect my pension?
If you are saving into your pension a rise in interest rates could be good news. If your pension savings are invested in Bonds and Securities, you may find the return on them is better, however if your funds are invested in Equities and Funds the improving interest rates may reduce the market. Therefore, a balanced portfolio will provide some security and opportunity from rising and falling interest rates.
When you are over 55 years old you are in a position where you can access your pension. Pension products can also be affected by interested rates. Guaranteed return pension product such as Annuities and Fixed Term Annuities have a direct relationship with interest rates as the pensions are invested in fixed securities including government bonds which are fixed to interest rates. Therefore, the higher the interest rate normally the higher the annuity rate or the fixed term annuity rate. Annuities are also based on your personal health and lifestyle which can have a significant impact on the annuity rate you receive.
If interest rates continue to increase it maybe bad news for mortgage holders but good news for people wanting guaranteed income pensions such as Annuities including Enhanced Annuities as well as Fixed Term Annuities which are treated as a drawdown product.
Ignoring interest rates could be a mistake as you could be missing out as they start to rise. At Pension Options Direct, we can assist you with any pension enquiries you may have. Giving you the peace of mind when it comes to your pension.
As always Pension Options Direct are happy to help with any pension related questions or enquires
Enhanced Annuities
Enhanced annuities work in the same way as a standard pension annuity but also consider your lifestyle and health conditions. If you qualify for an enhanced annuity you would expect it to provide more income for the rest of your life than a standard pension annuity would provide.
Lifetime Annuities
A lifetime pension annuity is designed to provide you with an income and is payable for the rest of your life as a minimum. The funds that you have saved into your pension pot are used to purchase an annuity either from your existing pension company or from a new pension income provider.
Fixed Term Annuities
A Fixed Term Annuity is a type of Guaranteed Drawdown product designed to allow you to access your pension in a more flexible manner than purchasing a set income for the remainder of your life which is what a lifetime pension annuity does. They provide a guaranteed return on your investment.
Flexi access Drawdown
Flexible Access Drawdown products provide a flexible way to take your pension and range from relatively low risk products with guaranteed returns to high-risk products investing in all manner of asset classes. Whilst providing flexibility they do not give a guaranteed income for the whole of life.
Releasing Tax Free Cash
When you are 55 or over you can access your pension and, if you wish, take a tax-free lump sum. You can then invest the remainder in a pension product and either take an income or keep it invested. You can normally take up to 25% of your investment tax free and use this money as you wish.
Tax Free Lump Sum
If your pension has not been crystalised (accessed previously) you can take a tax-free lump sum from the pension investment. This is normally in the form of a 25% tax free lump sum payment, but some types of pension schemes do have enhanced benefits and permit more than 25% to be taken.
State Pensions
The Basic State Pension is available to men born before 6th April 1951 and women born before 6th April 1953 and the New State Pension available to those born later. We have links to the Government information pages and the State Pension Age Calculator and a link to obtain your State Pension Forecast.
Equity Release
Is a way of taking some of the equity (investment wealth) built up in your property as tax-free cash to provide additional income in retirement or to pass over inheritance money to the family before dying, repay other mortgages or borrowing or to just spend on something you have always wanted.
PENSION OPTIONS DIRECT
What areas do we cover?
With our office in Ilminster we can provide face to face meetings for people in the Somerset area including Taunton and Yeovil. We are may also be able to arrange face to face meetings in the areas of Bridgwater, Glastonbury, Shepton Mallet and Wells areas.
We are happy to have video meetings with people and therefore can provide a visual meeting to anyone in the UK. We are happy to talk through your options over the phone regardless of your location, so we can discuss your needs. We also are very happy to communicate with you through email which many customers now prefer, we can therefore provide a full UK coverage.