5 min read 10 Sep 21
Everyone knows all too well the difficulties created by Covid-19 when the pandemic was in full flow last year. Fast forward to today, and although there are finally signs of a return to some kind of normality in the UK, it’s clear that we’re still in a period of transition that presents its own set of challenges and brings a fair share of interesting questions along with it. This month we’ve picked two issues that, although quite different, are both unique to this moment in time. First up, we’re going to look at consumer finances as they come through the pandemic, before exploring the great debate around returning to office working.
Positive headlines suggest that personal finances are in good health, including the faster-than-expected rate of economic recovery in the UK fuelled in large part by people returning to eat out in pubs and restaurants. Indeed, household consumption was a major contributor to the 4.8% GDP gain during the second quarter of this year. This was still 7.3% behind the previous 2019 peak, which could indicate that there is room for further improvement throughout the rest of this year.
So far, so good then. But things start to look a little less optimistic when we lift the lid on the detail of people’s financial circumstances. Online financial advice service, OpenMoney, carries out its UK Advice Gap research in conjunction with YouGov on an annual basis to understand the state of the nation’s finances. In its latest round of research this year, it found a general improvement in household finances throughout the pandemic as the combination of working from home and lockdown restrictions on leisure pursuits helped people pay down debt. The proportion of the 2,005 UK adults surveyed with no outstanding debt increased from 34% in 2020 to 38% in 2021. However, one in three still have unpaid short-term debts such as an unauthorised overdraft, loans from family and friends, catalogue debt, or a credit or store card.
The same research also found that just under one third (29%) are experiencing financial difficulties due to unexpectedly high bills and one-off costs. The challenge of meeting one-off costs is compounded for those who already have outstanding credit, with 43% of people in this position experiencing financial problems as a result.
As you might expect, as many people took the opportunity to pay off outstanding debts during lockdown, this created an opportunity to build up savings. And to quite a remarkable extent, as it turns out, with the household savings ratio (household savings as a proportion of household disposable income) increasing from 8.9% in January-March 2020 to 25.9% in April-July 2020, according to research by The House of Commons Library, which is a record high since this data was first recorded in 1987.
It’s often said that the UK has long since moved away from a savings culture, so the question remains, how long these good habits will last? An audit into living standards carried out by the Resolution Foundation found that in June 2021, just 17% of people who had increased their savings during the pandemic planned to up their spending as a result. But an emerging pattern between the various lockdowns last year suggests that this may not always play out when the opportunity to spend arises. The household savings ratio decreased to 14.3% during July to September 2020 (from 25.9% in the previous quarter) as the UK economy started opening up again. Household spending did go on to increase again during the subsequent lockdowns that followed in late 2020 and early 2021.
Covid affected the job security and income streams of both those working in lower paid industries and others with higher earning careers. However, as is so often the case, the finances of lower income households felt the greatest impact. The same Resolution Foundation survey found that 32% of people with the lowest incomes saw a fall in savings, while 12% saw a rise. In strong contrast, only 9% of households with the highest income experienced a fall in savings while 47% saw a rise.
The positive amongst all this is that there will undoubtedly be people out there who have built up savings for the first time and some may be at the stage where they have enough to start thinking about how to make their money work harder. So this period of transition away from Covid (hopefully) feels like a very important moment for the advice industry to shout that bit louder about the great work it can do to educate people and get them started with financial planning and investing. And it may even be looked back on as a rare moment in time in which to try and cement the good savings habits developed during lockdown before spending has a chance to take hold again as life goes completely back to normal.
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