What market turmoil means for your money including pensions, mortgages and savings
THE pound has fallen further and government borrowing costs are rising as market turmoil continues.
The fall on Monday means £1 is now worth $1.21 after dropping to $1.23 last week - its lowest level against the dollar since November 2023.
It followed revelations that government borrowing hit a 27-year high causing concerns over the economy and fears that there need to be more tax rises.
The impact of this volatility is likely to hit people's finances including pensions, mortgages, savings, and anyone heading abroad.
As well as higher borrowing costs, there are concerns that inflation is not falling as expected and therefore interest rates will remain higher for longer.
When the government needs to borrow money, it issues bonds, often referred to as gilts.
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The interest rate on these bonds is known as the yield. Currently, these yields are rising, making borrowing more expensive.
The yield on 10-year gilts hit fresh highs last week not seen since 2008, while the yield on 30-year gilts is at its highest since 1998.
The increase in the 10-year gilts are particularly concerning as they are the benchmark for high street banks to set mortgage rates and other borrowing costs for Brits.
On paper, higher yields should make bonds more attractive to investors.
And if investors buy lots of bonds, they need to buy pounds to do so, which normally increase the pound's value.
However, that's not what's happening right now.
The rising yields are actually making investors more worried about the UK economy.
They fear the government might be struggling financially and that the UK could be heading for "stagflation" - a period of slow economic growth and high inflation.
What are gilts?
GOVERNMENT bonds, or gilts, are seen as the telltale sign of global investors' opinion on the health of the UK economy and its leadership.
They also shape investors' views on whether a Budget has been a success or failure.
Gilts are issued by the Government as parcels of debt that pay out a return — or coupon — to investors over a fixed term, such as five, 10 or 30 years.
The yield reflects the amount of interest paid, and increases when the price of a bond falls to reward the investor for the risk of holding a cheaper asset.
Yields increase when the price of a bond falls because investors want bigger returns for owning a riskier asset.
This makes the UK a less desirable place to invest.
As a result, investors are selling pounds rather than buying them, which pushes the pound's value down.
Official figures due on Wednesday are set to show that UK inflation remains above the 2% Bank of England target.
Here's what the market woes mean for your personal finances.
Pensioners and those nearing retirement
Market volatility is impacting UK pensions, creating both challenges and opportunities for retirees and those planning for retirement.
A weaker pound can affect the value of overseas investments, as currency fluctuations influence returns.
While a dip in your portfolio's value can be concerning, experts advise against panic selling.
While the UK gilt market's volatility has caused concerns, it's simultaneously boosted annuity rates, creating a potential advantage for those nearing retirement.
As gilt values fall and yields grow, annuity rates rise. Better annuity rates mean a higher income.
An annuity is a type of retirement product you purchase with the money from your pension pot. It pays you a guaranteed income for life.
Fresh data from Hargreaves Lansdown shows a 65-year-old with a £100,000 pension could now receive an annual income of up to £7,425.
That is a notable increase from the £7,235 offered just a week ago, and a substantial 48% jump from three years ago.
This rise in annuity rates is bucking the trend seen in previous years, where falling interest rates and gilt yields were expected to drag down annuity incomes.
While this presents a valuable opportunity for retirees to secure a higher guaranteed income, financial advisers urge caution.
Shopping around and comparing rates from different providers is crucial.
Sarah Coles, head of personal finance at Hargreaves Lansdown, added: "Once bought, an annuity cannot be unwound and different providers offer different rates.
"If you take the first quote offered without checking the rest of the market, you may find you've made a costly mistake. Using an annuity search engine can help you check the market quickly and easily before you make a decision.
"You also don't need to annuitise all your pensions at the same time if this doesn’t work for you.
"You can take a flexible approach and annuitise in stages throughout your retirement as your needs evolve."
First-time buyers and homeowners
The UK gilt market sell-off is creating a ripple effect in the mortgage market, potentially pushing up borrowing costs for homeowners.
Rising gilt yields, driven by persistent inflation concerns, are impacting swap rates, the financial instruments lenders use to price fixed-rate mortgages.
This means that mortgage rates, which had been predicted to fall, could now rise.
Two-year swap rates, reflecting market expectations for future interest rates, have jumped from 4% in mid-December to over 4.5%.
Nicholas Mendes of John Charcol warns, "The coming year could be another painful one for mortgage holders.
While some lenders recently engaged in a "mini price war," lowering certain rates, others have already implemented increases.
Mark Harris of SPF Private Clients advises borrowers to seek advice from a mortgage broker and consider locking in a rate now, even if the mortgage isn't needed immediately.
This year, an estimated 690,000 UK homeowners will reach the end of their fixed-rate deals, many of whom secured low rates before the 2022 market turmoil.
A further 350,000 homeowners coming to the end of two year fix who are remortgaging this year are expected to see their rate fall as they locked in when rates peaked.
While some with expiring two-year fixes may see lower rates, the majority face increases, with potential monthly payment jumps of around £146.
Louis Mason, content and communications director at Oportfolio Mortgages, said: "Inflation data this week will be critical for market sentiment.
"An upside surprise could push swap rates and mortgage pricing higher as lenders price in risk.
"I agree with Frances Haque's assessment - current bond market volatility and inflation persistence may prompt lenders to adjust rates upward in the short term."
I can I get the best mortgage deal?
IF you're looking for a traditional type of mortgage, getting the best rates depends entirely on what's available at any given time.
There are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you're remortgaging and your loan-to-value ratio (LTV) has changed, you'll get access to better rates than before.
Your LTV will go down if your outstanding mortgage is lower and/or your home's value is higher.
A change to your credit score or a better salary could also help you access better rates.
And if you're nearing the end of a fixed deal soon it's worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal - but compare the costs first.
To find the best deal use a to see what's available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
You'll also need to factor in fees for the mortgage, though some have no fees at all.
You can add the fee - sometimes more than £1,000 - to the cost of the mortgage, but be aware that means you'll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember you'll have to pass the lender's strict eligibility criteria too, which will include affordability checks and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month's payslips, passports and bank statements.
Savers
While rising gilt yields could theoretically lead to higher savings rates, the reality is unclear.
Banks and building societies might offer better returns on savings accounts to attract deposits, as they can potentially earn more by investing in higher-yielding government bonds.
However, this isn't a guaranteed outcome.
Factors like operating costs and competitive pressures also play a significant role in setting savings rates.
Savings rates are also primarily influenced by the Bank of England's base rate, currently at 4.75%.
Mark Hicks, head of active savings at Hargreaves Lansdown, added that short-term fluctuations in gilt yields are unlikely to have a major impact on the Bank's decision to cut rates.
How can I find the best savings rates?
WITH your current savings rates in mind, don't waste time looking at individual banking sites to compare rates - it'll take you an eternity.
Research price comparison websites such as MoneyFactsCompare.co.uk and MoneySupermarket.
These will help you save you time and show you the best rates available.
They also let you tailor your searches to an account type that suits you.
As a benchmark, you'll want to consider any account that currently pays more interest than the current level of inflation - 2%.
It's always wise to have some money stashed inside an easy-access savings account to ensure you have quick access to cash to deal with any emergencies like a boiler repair, for example.
If you're saving for a long-term goal, then consider locking some of your savings inside a fixed bond, as these usually come with the highest savings rates.
Holidaymakers
A fall in the value of sterling is bad news for holidaymakers, who will find they get less travel money at the Foreign Exchange.
Sterling fell to $1.214 on Monday, down from $1.251 this time last week.
That means buying anything abroad seems more expensive and can impact what you can afford to do on your holiday.
For example, if the value of the pound versus the dollar is $1.25/£1 then for every £100 you change up, you get £125 dollars.
But, if the pound to dollar exchange rate drops to $1.21/£1 you'll only get $121 for £100 holiday spending money.
You can take some steps to make your travel money go further.
Overseas spending cards mean you don't have to worry about carrying wads of cash, too.
Tony Redondo, founder at Cosmos Currency Exchange said: "The Pound has already fallen by over 2.5% against the Euro and by nearly 5% against the Dollar since Christmas.
"Further falls are expected across the board.
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"Add in the fact that Trump's inauguration is now just over one week away and the negative economic effect his tariff plans could have on both the UK and Eurozone economies could see the Pound trade at $1.15 or lower against the greenback."
However, it remains unclear if Trump will follow through his plans to introduce such tariffs.
What are the alternatives to taking cash abroad?
THERE are a number of specialist cards that can give you a great exchange rate and fee-free spending and cash withdrawals when abroad.
These cards include debit and credit cards and pre-paid cards, which allow you to pay abroad without fees or at a set exchange rate.
Check your debit card
You should always check the terms and conditions of your debit card to see if, on the off chance, you can use it abroad without any extra fees.
This can often take the pain out of having to buy currency ahead of time and rely on cash.
Your bank will automatically convert your transactions to the correct currency with the live exchange rate so ensure that you always pay in the local currency.
Chase, First Direct and Starling all offer fee-free spending when yous use their debit cards abroad.
Those without this capability could choose to link their bank account with Currensea's Mastercard debit card via open banking.
Then when you spend or withdraw on the Currensea card, it charges your linked current account in pounds (via direct debit), avoiding the non-sterling transaction fees and ATM fees that most banks charge.
Travel credit cards
Travel credit cards allow you to spend money abroad without being hit by any fees or hidden charges.
But, they may still charge you for taking cash out.
We recommend the Barclaycard Rewards Visa because it doesn't charge for using it abroad, and there are no fees for withdrawing cash if you pay off your bill in full each month.
You must always pay off your balance before the end of the month with these cards to ensure that any money you save isn't wiped away by paying interest.
Prepaid card
An alternative to carrying cash or your debit card around is to get a pre-paid card.
Brands like Revolut, Wise and EasyFX all provide prepaid travel cards.
HSBC launched its Zing subsidiary in January 2024, which gives existing and non-HSBC customers access to a prepaid debit card without fees.
The card can hold up to 10 currencies and be used in more than 200 countries.
These cards allow you to put a set amount of cash on the card at a fixed exchange rate.
So if the rate is good now you can put money on your card, and it will stay that rate when you are on holiday.
But, these cards can sometimes have hidden costs and charges so be sure to read the small print.