UK households face heavy pressure and growing debt in 2022
UK households face a severe financial crisis and growing debt levels over the coming year. The impact of the new Omicron variant remains uncertain and the recent surge in inflation, expected interest rate hikes and the end of some elements of political support all look set to weigh on household finances in 2022, according to one. new report.
The latest data from the Savings and Resilience Barometer Report by Hargreaves Lansdown (HL.L) and Oxford economy found that the increase in financial resilience experienced by UK households during the pandemic during the pandemic is likely to be reversed in half.
Financial resilience – the ability to withstand short- and long-term income and expenditure shocks – has been highlighted over the past two years as Britons grapple with the economic uncertainty of the pandemic.
COVID-19 has triggered the UK’s deepest economic contraction since World War II. However, UK household finances have remained surprisingly resilient, according to the report.
Contrary to the very sharp drop in economic production (GDP), household income remained broadly stable in 2020, supported by government measures such as the job maintenance program and the increase in universal credit.
Containment and social distancing measures also imposed a period of spending restraint, leading to an increase in the savings rate which reached a post-war peak in 2020. At the same time, outstanding loans to household consumption fell by more than 10%, according to HL. .
As 2022 approaches, the rising cost of living has raised concerns as inflation as measured by the Consumer Price Index (CPI) hit a decade-long high of 4.1% in October 2021, fueled by rising commodity prices, labor shortages and supply. chain breaks.
There is also speculation that the Bank of England will act soon to tighten monetary policy. HL predicts that the Bank’s key rate will rise to 0.5% by the end of 2022, pushing up the cost of credit and mortgage financing.
This would correlate with a “steady increase” in interest payments on debt and a squeeze in household budgets, according to the report.
Higher interest rates will reduce the affordability of debt repayments for UK households, illustrated by an expected 2.3 point drop in the ‘control your debt’ score on the Savings and Resilience Barometer.
According to the latest data, the current average UK Household Barometer score 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 the breathing space we built up during the pandemic, with higher inflation, lower real wages, higher taxes and interest rate hikes putting a major dent in in our financial resilience. For those who have battled the pandemic, this is the last thing they need, ”said Sarah Coles, senior personal finance analyst at HL.
The report found that while the overall financial resilience of Britons increased during the pandemic, there were big differences in the experiences of those who spent less, who were able to save, and those who saw their incomes decline.
Monthly spending by low-income households changed very little during the pandemic compared to an overall household spending decline of over 9% during this period. In contrast, households in the top two income quintiles recorded significant average spending declines of 14.6%.
This is because higher-income households spend a “much higher” proportion of their spending on travel, transportation and recreation services which have been disproportionately restricted by COVID-19, according to the report.
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Low-income households, in the bottom 20% before the pandemic, who spend a much higher proportion of their spending on basic necessities, have seen their spending stagnate. As a result, although they saw their incomes well protected by policies such as the leave scheme and the increase in universal credit, low-income households saw the smallest improvement in their savings rate during the pandemic. .
Low-income households that go into debt generally have a much harder time controlling, as a much higher arrears rate suggests, the report said.
It is estimated that 15.3% of them are behind on the repayment of a debt (non-mortgage) or on a household bill, more than four times the national average.
Households with children also saw a smaller average decline in spending, possibly due to the need for home schooling during this time, which resulted in additional spending on items such as food.
In general, parents are much less likely to reach the threshold of financial resilience, with single-parent households being particularly likely not to do so. “The data underscores the widespread danger facing a majority of young families,” the report said.
Only one in six lone-parent households (16.6%) have a combined asset and life insurance policy to cover mortgage debts and future living expenses for their children in the event of death.
Overall, less than half (41.2%) of families had a combined asset and life insurance policy that would cover their children’s mortgage debt and future cost of living.
This highlights the challenges that the majority of single-parent households face in investing and planning for the future, with the group scoring 24.0 on the Savings and Resilience Barometer, which is half the national average. .
The report also noted regional divisions. Across the 12 UK Government Office (GOR) regions, the highest average scores were seen in the South of England, with the South East coming out on top as the best performing area in the country in terms of resilience. Despite a per capita income significantly higher than the rest of the UK, London’s score was not much higher than the national average, “a reflection of the higher cost of living (especially housing) and d ‘a higher level of financial inequality,’ according to the report.
More than a quarter (26.8%) of households did not have access to cash savings that would cover at least three months of essential expenses if they lost their income.
According to the report, self-employed households “generally face greater uncertainty and income volatility”, with salaried workers “being significantly more likely to be entitled to more generous sickness and severance pay which would help mitigate the consequences of two of the main sources of a personal income shock ”.
Inactive households scored well below the national average, with a lack of employment associated with lower incomes and less ability to build up a savings buffer.
According to HL, only 39.7% of working-age households are on track to achieve a retirement income of £ 26,000 per person in today’s money.
Read more: Workplace trends: forecast for 2022
Pension plan provisions for salaried workers were much more likely to be compatible with a comfortable retirement, with 42.8% of employee households meeting the report’s cut-off value for pension adequacy. However, only 22.3% of the self-employed have saved enough for retirement for their lifetime, almost half the rate for employees.
However, self-employed households obtained higher average scores for homeownership and other assets.
“Low income people, youth and renters all faced major challenges keeping their heads above water. Already 15% of low-income people are behind on bills or debt repayment, so with these skyrocketing bills and interest on their debt rising, the big pressure could pull them down, ”he said. said Coles
“However, it is not just these vulnerable groups with worrying gaps in their finances. The barometer examines how each group compares to the five pillars of financial resilience and produces unexpected results.
“So, for example, he identifies that even among high-income families, a surprising number do not have enough savings for rainy days or are not on track to save for retirement for the duration of the day. During this time, nearly half do not have enough life They are also exposed to variable rate loans, which could make them vulnerable in times of rising rates.
Hargreaves Lansdown used the research to create a new comparison tool to help people improve their resilience and provide educational support.