UK households are facing a big financial squeeze and mounting debt in the year to come. The impact of the new Omicron variant remains uncertain and the recent jump in inflation, expected interest rate rises and the ending of some elements of policy support all seem set to squeeze household finances in 2022, according to a new report.
The latest data from the Savings and Resilience Barometer report from Hargreaves Lansdown (HL.L) and Oxford Economics found that the boost to financial resilience experienced by UK households during the pandemic during the pandemic are likely to be reversed by half.
Financial resilience — the ability to withstand income and expenditure shocks in the short and longer term — has been highlighted over the last two years as Brits grappled with the economic uncertainty of the pandemic.
COVID-19 triggered the UK's deepest economic contraction since World War II. However, UK household finances have remained surprisingly resilient, according to the report.
In contrast to the very large fall in economic output (GDP), household income remained broadly stable in 2020, supported by government measures such as the job retention scheme and the uplift to universal credit.
Lockdowns and social distancing measures also enforced a period of spending restraint, leading to an increased savings rate which reached a post-War high in 2020. At the same time, the stock of household consumer credit outstanding fell by over 10%, according to HL.
Heading into 2022, concerns have arisen around the increase in the cost of living as inflation as measured by the consumer price index (CPI) reached a decade-long high of 4.1% in October 2021, fuelled by higher commodity prices, labour shortages and supply chain disruptions.
There is also speculation that the Bank of England will soon act to tighten monetary policy. HL forecasts the Bank’s policy rate to increase to 0.5% by the end of 2022 pushing up the cost of credit and mortgage finance.
This would correlate with a "steady increase" in debt interest payments and a squeeze in household budgets, according to the report.
Higher interest rates will reduce the affordability of debt repayments for UK households shown by a forecast drop of 2.3 points fall in the "control your debt" score on the Savings and Resilience Barometer.
According to the latest data, the current average barometer score for British households is 57.7. By the end of the year, HL expects it to fall back to 56.2, as households succumb to the "big squeeze".
“The big squeeze could crush half of the breathing space we built during the pandemic, with higher inflation, falling real wages, rising taxes and interest rate hikes putting a major dent in our financial resilience. For those who struggled through the pandemic, this is the last thing they need," said Sarah Coles, senior personal finance analyst at HL.
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The report revealed that while Brits' overall financial resilience increased during the pandemic, there were great differences in the experiences of those who spent less, who were able to save, and those who saw a reduction in income.
Low-income households’ monthly expenditure changed very little during the pandemic compared with an overall decline in household spending of over 9% during this period. In contrast, households in the top two income quintiles saw significant average declines in spending of 14.6%.
This is due to higher-income households allotting a "much higher" proportion of their spending to travel, transport and leisure services that were disproportionately constrained by COVID-19, according to the report.
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Low-income households, in the bottom 20% pre-pandemic, who allocate a much higher proportion of their expenditure to day-to-day essentials, saw their spending flatline. As a result, despite seeing their incomes well protected by policies such as the furlough scheme and universal credit uplift, low-income households saw the smallest improvement in their savings rate during the pandemic.
Lower income households who take on debt typically find it much harder to control, as suggested by a much higher rate of arrears, according to the report.
An estimated 15.3% of these are behind on a (non-mortgage) debt repayment or a household bill — more than four times the national average.
Households with children also registered lower average falls in spending, likely due to the need for home schooling during this time which led to additional expenditure on items such as food.
In general, parents are much less likely to meet the financial resilience threshold, with single-parent households particularly more likely to fall short. "The data does underscore the widespread jeopardy faced by a majority of younger families," the report said.
Just one-in-six (16.6%) single-parent households have combined assets and life insurance to cover mortgage liabilities and future living costs for their children in the event of their death.
Overall, less than half (41.2%) of families were found to have combined assets and life insurance that would cover mortgage liabilities and future living costs of their children.
This highlights the challenges faced by the majority of single parent households in investing and planning for the future, with the group scoring 24.0 on the Savings and Resilience Barometer — half the national average.
The report also noted regional divides. Across Britain’s 12 government office regions (GORs) the highest average scores were seen in the south of England with the South East coming out on top as the country’s highest performing area for resilience. Despite having a significantly higher income per capita than the rest of the UK, London’s score was not much higher than the national average, "a reflection of higher living costs (particularly housing) and a higher level of financial inequality," the report found
Over a quarter (26.8%) of households did not have access to liquid savings that would cover at least three months of essential spending should they lose their income.
Self-employed households typically "face greater income uncertainty and volatility", the report found, with employed workers "significantly more likely to be entitled to more generous sick and redundancy pay that would help to ameliorate the consequences of two of the major sources of a personal income shock".
Non-working households scored well below the national average with the lack of employment being associated with lower income and a less ability to build a savings buffer.
Just 39.7% of working-age households are on track to achieve a retirement income of £26,000 per person in today’s money, according to HL.
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Pension plan provision for employed workers was much more likely to be consistent with a comfortable retirement, with 42.8% of employee households achieving the report's threshold value for pension adequacy. However, just 22.3% of self-employed people have saved enough towards their pension for their time of life — almost hlaf the rate of the employed.
However, self-employed households saw higher average scores for both home ownership and other assets.
"Those on lower incomes, younger people, and renters, all faced major challenges to keep their head above water. Already 15% of people on lower incomes have fallen behind on bills or debt repayments, so with those bills rocketing and interest on their debt rising, the big squeeze could pull them under," said Coles
"However, it’s not just these vulnerable groups with worrying gaps in their finances. The barometer delves into how every group measures up against the five pillars of financial resilience, and produces some unexpected findings.
"So, for example, it identifies that even among high income families, a surprising number don’t have enough rainy day savings or aren’t on track for pension savings for their time of life. Meanwhile almost half don’t have enough life cover to protect their families. They’re also exposed to variable rate borrowing, which could leave them vulnerable at a time of rate rises.”
Hargreaves Lansdown has used to research to create a new comparison tool to help people improve their resilience and offer educational support.