How to protect your pension from higher interest rates

Laura Miller

by , Freelance financial journalist

at PensionBee

09 June 2022 /  

June 2022

Man wearing glasses holds paper airplane while scratching head.

Higher interest rates are typically not good for stock market investors - which includes millions of pension savers. This is because stock markets and interest rates tend to move in opposite directions - when interest rates go up, stock markets go down, and vice versa. If your pension is still all or partly invested, this can be a problem. Higher interest rates could mean the value of your pension falls. However, there are some important things to remember - and some helpful tricks - to getting the most out of your pension money when interest rates are rising.

Remember! Pensions are long-term investments

If you have decades left before you retire

Pensions are long-term investments. Stock markets and interest rates will go up and down. As a result, so will the value of your pension. This is normal, and shouldn’t cause you too much worry.

If you still have decades to go before you want to draw an income from your pension, the best guidance may be to do nothing right now.

If you are close to retirement

If you’re close to retirement and are looking to soon begin taking an income from your pension, or if you’re already taking an income, you may be worried about how to protect your pension from higher interest rates. You may want to rethink your pension savings strategy.

The following are things to consider:

Pension investing when interest rates are rising

Short dated bonds

When interest rates go up, the prices of bonds go down. This can reduce the value of bond investments. But shorter dated bonds do better than longer dated bonds when interest rates are rising. This may still mean their prices fall, just by not as much.

Bonds are attractive to pension investors near retirement because they are typically seen as ‘safer’ than other assets. So if bonds are required, investing in shorter dated, also known as shorter duration, bonds, can help investors weather higher interest rates.


Commodities such as oil and gold can do well when interest rates are rising because of higher inflation (which is what’s happening now in the UK and the US). This is because higher inflation means higher energy prices. Energy companies also do well for the same reasons.

Financial stocks

Banks and other financial institutions can benefit from higher interest rates. This is because they can charge more to lend money to borrowers. This increases their profits, the value of their company shares, and the likelihood they will give higher dividends to shareholders (investors).

Pension income when interest rates are rising

Keep your debt low

Keeping a lid on debt is always advisable, but especially when interest rates are rising. Higher interest rates on debt means you pay more to borrow. If you’re on a fixed income, like a pension, this will quickly eat into your monthly spend. Interest-free credit cards are the best way to pay for things on credit. If you already have a large amount on a credit card with a high interest rate, look on comparison sites for 0% balance transfer deals. These let you move your debt to a credit card charging zero interest (usually for a small fee of around 2.5% of the debt), giving you more time to pay off your borrowing without incurring more charges.

Fix your mortgage

For the same reasons as above, getting a fixed-rate mortgage is a good idea when interest rates are rising. This means you’ll know exactly how much your mortgage repayments will be each month for the length of the fixed term. Alternatively, if you don’t get a fixed rate mortgage and fall onto your lender’s standard variable rate, this will go up every time the Bank of England raises interest rates, costing you more every time in higher monthly repayments.

Guaranteed income

If it looks like stock markets are going to be more volatile, this can affect how much those in retirement can withdraw to live on. Some people find fixing the amount of pension they receive each month is a good way to ensure they can cover their regular monthly bills. This can be done with an annuity.

According to Legal & General’s annuity calculator for a 65-year-old with a £100,000 pension pot, on 9 June the average annuity rate for a guaranteed income for the rest of their life is £3,945 a year.

Different providers offer different rates, so it’s important to shop around to get the best deal. You also don’t have to use all of your pot to buy an annuity. You also don’t need to buy an annuity as soon as you retire – it may make sense to wait until you are older. Remember buying an annuity is irreversible, so think carefully about this move.

Finally – key points

  1. Rising interest rates affect different investments differently, so you may notice fluctuations in the value of your retirement pot.
  2. Short dated bonds, commodities, and financial companies can do well in times of rising rates.
  3. Keeping your credit card debt low and your mortgage on a fixed rate can help avoid increases in the cost of borrowing.

Laura Miller is a freelance financial journalist.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

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