UK household finances strong in face of inflation and spending increase

UK households are likely to see a drop in their financial resilience this year, amid increases in consumer spending, inflation and higher interest rates, says a report which predicts Britons will dig into cash accumulated in the pandemic.

But the decline will still leave the average household in stronger financial shape than before Covid-19 struck, according to the forecast from Oxford Economics, backed by investment platform Hargreaves Lansdown.

The average resilience level, which rose from 54.5 in 2019 to 57.7 in mid-2021, will slip to 56.2 at the end of 2022, said the report, which combines into one barometer 17 indicators on household finances, including data on savings, debt, pensions and life insurance.

However, the aggregate figures mask sharp differences between richer households, which are in a position to spend the money saved during the pandemic by scrapping holidays and leisure activities, and poorer homes, which remain under financial pressure, Oxford Economics said.

In mid-2020, the resilience barometer reading for low income households was just 41.7 versus 69.2 for high income homes. Young people lagged well behind older people — with a score of 47.1 for Generation Z against 60.8 for baby boomers.

As the authors said, all income groups take on debt. But the poor have less control over their borrowings: more than 15 per cent of low-income homes are behind on (non-mortgage) repayments, more than four times the national average.

Less than half (41.2 per cent) of families have enough in assets and life insurance to cover mortgage liabilities and children’s future living costs in the event of the main income-earner’s death, the writers said. Among single-parent households the figure is just 16.6 per cent.

More broadly, a third of the UK does not have enough savings to cover three months of essential expenditure, with the self-employed looking particularly vulnerable, the research group said. The self-employed also have smaller pension pots, though they tend to have slightly higher levels of home ownership and overall household wealth.

“If we are serious about improving financial resilience for all, we need to make saving and investing an everyday activity for everyday people,” said Chris Hill, chief executive of Hargreaves Lansdown.