UK households pay down debt through winter lockdown

Peter Wilson
(IFA Magazine)

 

Squeezed savings, lower income from employment and less money available to spend kept UK household finances under pressure in the opening quarter of 2021 despite greater efforts to pay down debt, according to the Scottish Widows UK Household Finance Index (HFI).

The headline seasonally adjusted index ‚Äď which measures households‚Äô overall perceptions of financial wellbeing ‚Äď registered 42.0 in Q1, up from 41.1 in Q4 2020. Although still well below the neutral 50.0 value,¬†this change¬†signalled the slowest deterioration in UK household finances¬†since the start of the pandemic.

Monthly data highlighted an increase in resilience over the course of the first quarter, as the headline HFI index gained momentum in both February and March.

This provided positive signals that household sentiment has been buoyed by the roadmap for easing COVID-19 restrictions. While the UK is set to emerge from lockdown in the coming months, the outlook for finances over the year ahead remained downbeat and worsened slightly since Q4 2020.

Jackie Leiper, Pensions, Stockbroking & Distribution Director, Scottish Widows, said: 

“Families’ finances remained under pressure as lockdown continued, with shrinking income from employment, higher living costs and a continued squeeze on cash. However, the glimmer of hope is that the latest dip in overall financial wellbeing was the slowest since the start of the pandemic, as people focused on paying down existing debt, which saw the quickest fall since the survey began in 2009. This was also supported by a desire to build financial resilience, as saving for an emergency or rainy day was the biggest priority for households in Q1 despite one in five saving less for retirement in the same period.

‚ÄúWith a clearer roadmap towards the lifting of restrictions and opening up of sectors forced to pull the shutters down over the past 12 months, attitudes towards major purchases continued to lift from the record lows of last spring. While expected pent up demand as hospitality and travel sectors gear up for reopening and people look forward to doing things again, it‚Äôs important not to lose momentum on building financial resilience for the long term.‚ÄĚ

Planning for and protecting the future

The index highlighted a sustained squeeze on the longer-term drivers of financial wellbeing during the first quarter of the year. Around one in five (20%) of UK households saved less for retirement during Q1, while 18% would have withdrawn from their pension funds given the chance, down slightly from the previous quarter (19%).

UK households’ savings were focused around having enough money for emergencies or a rainy day. It was a priority for a third of respondents and topped the savings list amidst uncertainty surrounding the pandemic and falling incomes from employment. The other key savings priorities were holidays (29%), home improvements (22%), retirement (20%), and buying a property (20%).

Heightened economic uncertainty continues to highlight concerns around financial resilience among UK families, with, one in 10 households having no savings at all, and around a third (31%) only having enough savings to cover essentials for up to three months.

Despite this, only just over a third (36%) of households have life insurance, and a further 11% are planning to take out cover in the next two years. A much smaller proportion are currently protected financially for critical illness (17%), and just over one in 10 (12%) have mortgage protection. Looking at sudden loss of income, just 18% have, or plan to take out income protection to sure up their spending.

 

Workplace activity, income and job security

Income from employment continued to decline in the first quarter of 2021, according to the latest survey data, as another national lockdown forced cuts in working hours and continued furlough. The rate of decline was the second-fastest since data collection began in early 2009, slower only than Q2 2020.

The appetite for major purchases such as cars and holidays, fell at the slowest rate since Q1 2020, while the quarter-on-quarter rise was the largest across all survey measures, suggesting a more secure near-term outlook amid the planned easing of restrictions. Those aged 55 to 64 (the oldest age group tracked by the survey) were the most positive towards this type of spending.

In line with lower incomes, UK households more broadly remained concerned about job security in the first quarter of 2021, although this view was much less downbeat than at the end of 2020, and the index was the highest for one year.

At the same time, workplace activity decreased at a faster pace in Q1 2021 according to surveyed households, despite the quarterly decline masking a slight improvement in March.

 


Household finances

Despite a continued drop in the amount of money UK households have available to spend, the pace of reduction slowed very slightly, with a clear divergence between higher and low income households. Meanwhile, households continued to deplete their savings into 2021, although overall this has moderated since the previous quarter, while the latest fall in overall debt was the fastest in the twelve-year series history.

 

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