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What negative interest rates mean for your pension, savings and debt

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Suban Abdulla
·3-min read
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Pound coins and bank notes.
Negative interest rates are often interchangeably used with the BOE’s base rate. Photo: Getty

The Bank of England (BOE) has told high street banks and building societies they have six months to prepare for negative interest rates.

Prompted by the coronavirus pandemic, the BOE has held interest rates at a record low of 0.1% since March 2020 to boost the UK economy.

While policymakers at England’s central bank said that the request did not mean a cut in borrowing costs below zero was imminent or even likely, but BOE needs negative rates as an available option in its economic toolbox in the event of another downturn.

So the possibility of banks paying you to borrow and charging you to save money is looming.

What are negative interest rates and how do they work

Negative interest rates are often interchangeably used with the BOE’s base rate.

When rates are negative, instead of earning interest on money left with the BOE, financial institutions will be charged to park their cash with the central bank.

Lower interest rates means that the BOE wants people to spend more and save less, and encourage companies to borrow, invest and grow to bump the economy.

The mechanism also helps banks to decide how much interest they pay to savers, as well as what they charge mortgage borrowers and those who take out a loan.

WATCH: What are negative interest rates?

So what would the impact be for pensions, savings and debt?


Most mortgages in the UK are taken out on a fixed basis, meaning homeowners would not see their rate change in the event the bank rate dips below zero.

Variable mortgages tend to not fall below a particular level. But, it could see lenders increase the margins on new tracker mortgages, this means the rate could fall a little if the base rate is cut and lenders will likely state in their terms and conditions they have a lower limit.

However, the move could mean new mortgage borrows may get cheaper deals. But it is unlikely people will be paid to borrow money anytime soon.

READ MORE: Bank of England tells banks: Be ready for negative rates in six months


When it comes to rates on personal loans, which are already low and typically fixed once you take them out — a negative interest rate is unlikely to affect repayments.

New credit card customers usually get low rates to start off with, but they rise far above the base rate once introductory periods end. This means that the chances of your credit card rates falling into negative territory is unlikely.


Savers have already been dealt multiple blows in recent years.

Things took a turn for the worst, since the onset of COVID-19 with rates on savings accounts nosediving — even the government-backed national savings and investment (NS&I) cut returns.

A negative base rate could lead to more accounts paying 0% or only slightly above that, meaning inflation could further eroded the value of your deposits.

According to the BOE, the average UK instant access account pays just 0.12%. With accounts that require you to lock your money away currently offering an average return of 0.51%.

It could also see wealthy savers being charged for holding large sums of money on deposit.


The impact of negative interest rates on pensions is relatively unknown and it hasn’t been seen yet, but pensions could avoid major damage as they provide a guaranteed income in retirement.

But, there could be a drop in potential income for those with defined contributions.

The impact is most severe for people who are close to retirement age and a significant drop in value could scupper their retirement plans as they’ll have less time to recover any losses.

That being said those with many years to go before retirement could see less of an impact as they have more time to ride out the blow.

WATCH: Will Interest rates stay low forever?