What rising interest rates might mean for you
There weren't too many surprises when the Bank of England chose to maintain the base rate of interest at 0.5% for the 78th month running on 6 August 2015, but there were pointers that a rise in rates is now firmly on the horizon.
Maike Currie, associate investment director at Fidelity Worldwide Investment, explains her view of what rising rates might mean for you.
What does it mean for families?
"As rates rise, they will impact families differently, depending on the size of their borrowings and the terms of their mortgage. Younger households - those in their thirties and forties - have done relatively well from the prolonged period of lower interest rates. But this has also left many overburdened with high levels of mortgage debt.
"In contrast, the older generation of homeowners is in a much better position, having benefited from a steady rise in house prices."
What does it mean for retirees?
"One of the casualties of lower interest rates has been safer streams of interest income. Retirees relying on their savings to supplement their pension income have felt the impact of low interest rates hardest. Many, no doubt, will greet an interest rate rise with relief.
"Other good news for retirees is that annuity rates which have been at historical lows could improve with a rise interest rates, which means those planning to retire soon could secure a higher income.
"Less positive is the possibility that retirees could see a fall in the value of their pension funds. This is because when investors near retirement age money is often automatically moved out of the market and into bonds, as a way of de-risking pension savings. Bond prices tend to fall when interest rates rise, in order to increase the yield and attract buyers."
What does it mean for investors?
"Investors could very likely see rates remaining at 0.5% until March next year, which will mark the seven-year anniversary of interest rates remaining at this 'emergency level'. When rates do eventually rise, expect a long, slow slog to 'normality'. Despite being dubbed the 'unreliable boyfriend' for his mixed messages on interest rates, Bank of England governor Mark Carney has made it very clear that a rate rise will be 'gradual and limited'."
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.