Financial security eroding at fastest pace since 2020

Household finances are “deteriorating” at the fastest rate since Covid-19 came to UK shores, as surging living costs and other economic concerns hit consumers’ pockets.

The amount of cash people have to spend has had the sharpest drop since 2014, according to long-term research. Meanwhile, pessimism over future finances has risen over the course of 2021, largely due to fears over inflation, job security and growing household debt.

Sentiment plummeted particularly in December, according to the latest Financial Wellbeing Index from Scottish Widows, falling from 44.0 in Q3 to 40.1 in the final quarter of 2021.

A score of 50 would mean no change in the last quarter, while a score of more than 50 would mean an improvement.

The rise in negative sentiment came as household savings were squeezed to the greatest extent since the end of 2013 and workers experienced a small drop in average income.

As rising living costs hit household budgets, pressure intensified on people’s savings and disposable income with both declining quicker than at any time in the past seven years. Only the highest earners added to their short-term saving pots during Q4. Almost a quarter of those with retirement savings said they would have raided their pensions for cash to relieve the pressure if they could have.

Meanwhile, personal debt levels doubled over 2021, separate figures from money.co.uk revealed recently, following a dramatic paying down of debts during the first year of the pandemic crisis.

By December last year, six in every ten Brits were in debt, with the average individual owing £25,879 – more than double the £9,246 they owed in 2020.

Financial sentiment is now the lowest it has been since the autumn of 2020, when we approached our first pandemic winter.

With the Consumer Prices Index (CPI) measure of inflation reaching a decade high of 5.1 per cent, three-quarters of consumers are now worried about the impact of such high inflation on daily life as well as any savings they may have.

Rising home energy prices top the list of inflation concerns – with four in every five elderly consumers particularly worried. Across the generations, rising petrol prices, not being able to save as much money and the purchasing power of cash savings occupy our greatest financial concerns.

“With inflation rising to its highest rate since 2011, many individuals are facing a cost-of-living crisis as prices surge,” says Steven Cameron, pensions director at Aegon.

“At what is already a penny-pinching time for households ... a high proportion are concerned about the immediate impact of inflation levels not seen for a decade on the affordability of everyday living, from hikes in gas and electricity costs to the price of essential items such as clothes and food.

“Undoubtedly, those on a fixed income face a tricky time ahead, and this includes pensioners who will be significantly impacted with a sizeable gap between the current 5.1 per cent inflation level and the much lower 3.2 per cent used to calculate next year’s state pension increase.

“A high proportion of those we surveyed said that they were concerned about not being able to save as much as a result of rising inflation as well as the purchasing power of cash savings decreasing.

“Those holding large amounts in cash savings are particularly at risk from high inflation. Despite the Bank of England raising interest rates in December to 0.25 per cent, any of this increase passed on to savers is likely to be outweighed by inflation decreasing purchasing power.”

This week, the Liberal Democrats called on the government to drop what it described as a planned stealth tax raid that “will clobber families who are already feeling the pinch,” as energy bills and the cost of living soar.

The party asserts that the government’s decision to freeze the personal tax allowance and higher rate tax threshold until 2025 will cost the average family in England and Wales £430 a year by 2026 – a total of £10.9bn.

Analysis by the House of Commons Library, commissioned by the Liberal Democrats, found the freeze will mean an additional 1.5 million people on low pay will be dragged into paying income tax by 2026, while a further 1.25 million people will fall into the higher rate tax bracket.

The research was based on modelling using the latest inflation forecasts from the Office of Budgetary Responsibility.