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UK cost of living crisis: Real wages set to fall as inflation, taxes and interest rates rise

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Households less likely to cope with financial shocks in 2022 and 15% of low-income Britons are already behind with bills and debt repayments

  • Households overall became more financially resilient during the pandemic   
  • The picture across regions and parts of society is strikingly uneven 
  • Situation to worsen this year due to inflation, taxes and interest rate hikes 
  • 15% of those on lower incomes already behind on bills or debt repayments










Far more households are less likely to cope with income shocks this year due to the cost of living squeeze, with those on lower incomes at a higher risk of getting into debt, new research has found.

Rising inflation and taxes, falling real wages and interest rate hikes are set to reverse half of the financial resilience people built during the pandemic, when those who still had a job had a chance to save more for a rainy day. 

Britons’ overall financial resilience, as measured by a new barometer by Oxford Economics and Hargreaves Lansdown, rose to 57.7 out of 100 last year, from 54.5 in 2019. 

However, it is expected to fall back to 56.2 as households succumb to the big squeeze, according to the research. 

Money worries: 15% of those on lower incomes have fallen behind on bills or debt repayments

Money worries: 15% of those on lower incomes have fallen behind on bills or debt repayments

Financial resilience is expected to fall back to 56.2 as households succumb to the big squeeze

Financial resilience is expected to fall back to 56.2 as households succumb to the big squeeze

The largest contributor to the forecast decline is a reduction in the level of surplus income, as spending continues to return to pre-pandemic levels and living costs rise. 

Meanwhile, higher interest rates – the Bank of England is expected to gradually increase interest rates to 0.5 per cent by the end of 2022 – will reduce the affordability of debt repayments.

But some parts of society are at biggest financial risk than others.

Those who already struggled to keep their heads above water during the pandemic – those on lower incomes, younger people, and renters – are in for another tough year.

For example, already 15 per cent of those on lower incomes have fallen behind on bills or debt repayments – a proportion more than four times bigger than the national average.

‘With [energy] bills rocketing and interest on their debt rising, the Big Squeeze could pull them under,’ said Sarah Coles, senior personal finance analyst at Hargreaves Lansdown. 

As the economy has further reopened since the summer the savings rate begun to normalise, a process that is expected to continue in 2022

As the economy has further reopened since the summer the savings rate begun to normalise, a process that is expected to continue in 2022

When it comes to cash set aside for a rainy day, a third of Britons overall do not have have access to savings that would cover at least three months’ worth of essential expenditure.  

But again, households who are employed are much more likely to have enough savings than than households who are self-employed.

Looking at the specific ‘save a penny for a rainy day’ barometer, the average score of employees is 64.6 – much higher than 48.1 of the self-employed, the report shows. 

When it comes to pension savings – another pillar of financial resilience – fewer than 40 per cent of working age households are on track for an annual pension income of £26,000, the current average.

And again, some parts of society have significantly lower pensions than others: only 22 per cent of self-employed people have saved enough towards retirement, compared to double that for employees. 

'A world of difference': Baby boomers are much more financially resilient than Generation Z

‘A world of difference’: Baby boomers are much more financially resilient than Generation Z

Even among high income families, a significant number are not putting aside enough for retirement, given their time of life.

Almost half don’t have enough life cover to protect their families, with single-parents the worst hit as only 17 per cent having purchased a life cover. 

‘Our barometer revealed that while our overall resilience increased during the pandemic, there was a world of difference in the experiences of those whose outgoings fell, who were able to save, and those who lost income,’ Coles said.

Those on high incomes had the highest financial resilience score of 69.2, followed by baby boomers at 60.8, while Generation Z along with those on low incomes scored the lowest, both at 47.1. 

There were also stark regional differences, with the South East being most financially resilient region, with a score of 60.8, and the North East the least, with a score of 54.4.

How to become more financially resilient  

The five pillar of financial resilience, according to Hargreaves Lansdown:

1. Control your debt: it is not that debt is inherently a bad thing for consumers. Indeed, there are very sound reasons why households need and do take on debt, for example to finance educational courses or a house purchase. However, ensuring that debt repayments are sustainable is a crucial first step to successful financial management. 

2. Protect your family: once debt is under control, ensuring that there is an adequate safety net to ensure the financial future of dependents in the event of catastrophe should be a priority for households. 

3. Save a penny for a rainy day: having access to a pool of savings that can help to mitigate the consequences of an unexpected shock to income or spending is a prerequisite of sound financial planning. 

4. Plan for later life: age comes to us all and planning for the associated drop in income during retirement is integral to preserve purchasing power during this period. Ensuring adequate pension contributions through working life and more actively managing funds closer to retirement are important in this respect.

5. Invest to make more of your money: finally, once households have accomplished the above, they have the freedom to invest any excess savings into assets that can help to build a better financial future. 

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