Returns for savers and retirees have been cut, as UK interest rates are dragged down to the lower levels on the continent.

UK borrowers, meanwhile, are about to be tempted by attractive, yet risky, euro deals.

Anybody can invest in euros, no matter whether they live inside the eurozone or not. Major financial institutions are already offering a range of euro investments. However, for most UK investors there is no great benefit to choose them - in fact there are extra risks.

Great expectations

The real issue for investors comes from what is happening on the interest rate front, and whether Britain will eventually move to join the single currency.

European Monetary Union (EMU) demands that interest rates in all eurozone countries converge to the same level and UK rates are currently 2 to 3 percentage points higher than eurozone rates.

As many money managers expect the UK to join the single currency, long-term interest rates have come down. The closer the prospect of UK participation gets, the higher the downward pressure will be on medium and shorter term rates.

Retiree squeeze

The lower interest rate outlook has hit annuity returns hard, now at their lowest levels in decades.

Retirees face low returns

Linked closely to treasury bond rates, they will fall further if Britain looks more likely to join EMU.

Financial advisers agree that people approaching their retirement have no alternative but to save more. A given amount of pension savings is just not buying as much retirement income these days, and it may well get worse.

Don't lock in

For home buyers about to take out a mortgage there have also been repercussions for home loan rates.

Locking into a fixed rate might look cheap now - they are currently below variable rates - but the situation could change dramatically.

UK interest rates are already on the way down due to other economic factors, and the 'euro effect' might combine to see substantially lower variable rates in two or three years.

The euro mortgages

With a number of banks starting to offer mortgages denominated in euros, some home buyers will be tempted to take out a euro-zone mortgage for their British property, enjoying lower rates and repayments.

But like any investment denominated in a foreign currency, the risk of exchange rate fluctuations must be considered.

Just look at what's happened to the pound's value this decade. Early in 1990s the pound bought almost 3.00 Deutschmarks? A couple of years later it had lost almost a third of its value to just over DM 2.00 only to rocket back above the DM 3.00 level by last year.

With the pound at near-record value, the chance of sterling depreciating and catching borrowers out is a distinct possibility.

However, the value of the pound would have to fall by at least 20% against the euro for the interest rate advantage to be cancelled out at current rates.

Credit war

And its not just lending for homes. European lenders are set to take on British banks and building societies offering a flood of credit cards and other lending products denominated in euros and exploiting the difference in interest rates.

Again the lesson is the same, be wary of spending in one country using money borrowed in another.

Financial advisers say Euro accounts are designed for those who either earn in euros or euro-zone currencies, who are spending the money there, or will be returning to live there soon.

But savers as well as borrowers should heed the warning. The uncertainty over currency movements also adds an extra risk factor into investing in euros when you want to enjoy the returns in the UK.

Those seeking to diversify investments across euro-zone markets will see no real benefit investing in euros.

Their 'foreign' investment will be converted into euros at some point in the transaction regardless of whether they offer pounds or euros up front.

If you fear that the pound will collapse, it may make sense to hedge your investments and move to the euro. However, if the euro project falters, pound sterling could become the European currency of choice.

Share confusion

Irregardless of whether the UK joins the single currency or not, share holders will have to brace themselves for some changes from 4 January 1999 onwards. The London Stock Exchange will quote share prices in both sterling and euros.

While there will be no change to investment strategies from this change, brokers have warned investors over the possible confusion on prices.