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ONS reveals weak financial resilience against coronavirus economic fallout

04/04/2019

Rachael Griffin

Tax and financial planning expert at Old Mutual Wealth

Basic financial resilience is crucial to a successful long-term financial plan. Rachael Griffin considers the new report from the Office for National Statistics that reveals many households lack secure financial foundations.

A new set of statistics from the Office for National Statistics has shed fresh light on financial resilience in the UK. Produced in response to a 2019 report from the UK’s Financial Capability Strategy, which warned that millions of people could be vulnerable to an income shock, the ONS says the new figures provide ‘insight into groups that may be more likely to experience difficulties during the current economic climate’ resulting from the coronavirus pandemic.

Financial resilience is going to be absolutely crucial as we stand up to the economic fallout of the coronavirus. Regrettably, for many people their finances are built on shaky ground.

The most important part of any financial plan is having a cash savings buffer in place to protect against a change in your economic circumstances like being made redundant, taking a career break to care for a family member, or being unable to work due to serious illness.

Having savings to fall back on in difficult times gives you time to make considered decisions about how to re-arrange your finances, and prevents you from being forced to turn immediately to your credit card to make ends meet.

This vital new research from the ONS will help build a statistically robust picture of the UK’s household financial resilience. We have good data on the financial transactions in household bank accounts – salaries & benefits received, spending patterns and debt repayments - but not enough data on the money we keep in the bank for a rainy day. This new data package sheds some light on the issue, and reveals some ugly truths.

It shows that more than 1 in 4 households don’t have the assets to cope with even a 25% reduction in income for 3 months. And only a little over half have adequate resources to manage a 75% fall in their income.

These are deeply concerning figures when you consider that many households could experience a dramatic drop in income as a result of the dire economic fallout of the coronavirus pandemic. Furloughed employees face an income drop of at least 20% - more for those that earn over £30,000 a year - and those made redundant or who can’t access the scheme could experience much sharper falls in their income.

The self-employed fare a little better than the employed when it comes to financial resilience, with a higher proportion having enough set aside to manage a period of income disruption. That financial resilience will be crucial since they are unable to access the government’s scheme for self-employed workers until the summer. The ONS suggests this may be due to behavioural factors, with self-employed people being more accumstomed to variable income through the year and having more set aside as a result. They will also recognise that the absence of sick pay and other employment benefits means they can normally expect to be more reliant on their own resources through a period of financial hardship.

These figures should provide a stark wake-up call about the state of our household finances. Millions of households don’t have sufficient financial resilience to survive even a modest fall in income, let alone a sustained drop lasting several months.

Since the last financial crisis some positive measures have been taken to protect households that find themselves in financial difficulty, for example to limit the predatory behaviours of some payday lenders and force credit card companies to do more to reach out to customers with persistent debt. While that will help to limit some of the worst symptoms of household financial insecurity, there has been insufficient progress on addressing the root causes of poor financial resilience by ensuring that families have deeper reserves to draw upon in times of need.

At the moment our immediate focus has to be on the imminent threat to public health, and limiting the economic damage caused to households in the short term. But when we do emerge from this crisis, it is vital that government, the financial services sectors and the public strive to embed financial stability across society.

Rachael Griffin, tax and financial planning expert at Quilter