Has the way we approach our finances changed in the last year?

Dale Critchley looks at how recent events have affected our approach to finances.

2020 will go down in history as the year of the coronavirus pandemic, an event which has touched virtually everyone on the planet. We’ve all had to socially isolate, which has affected not only how we work but who has been able to work. The government had to intervene to prop up the economy and family finances on a scale we’ve never seen. But what effect has that had?

A new savings culture

Across the UK, the household savings ratio reached 29.1% 1 in the second quarter of 2020. Put simply, that means the UK population didn’t spend £29.10 of every £100 they earned. So, were we transformed into a nation of savers?

Traditionally, a high savings ratio is associated with recession. As dark clouds gather, people make the decision to save for the upcoming rainy day. But 29.1% is the highest savings ratio seen this century, so what’s driving it?

Uncertainty about the future is bound to be a driver, but lockdown also introduced almost compulsory savings. Office workers worked from home without the expense of the daily commute. The hospitality and retail sectors largely closed down. So, while the furlough system meant many workers still had an income, there was little to spend it on.

Just as the virus itself has affected individuals differently, people across the UK have also felt the financial impact in different ways.

As part of our research into our attitudes towards work and retirement, our report Embracing the Age of Ambiguity (PDF 8.8MB) examined unpredictable futures and the strain this can put on the balance between work and home and employment and retirement.

A mixed picture across the UK workforce

Overall, 28% 2 of people we surveyed felt financially better off after lockdown, but there was lots of variation based on a range of factors:

  • Age - There’s a significant correlation with age – a massive 46% of those under 24 felt at least a little better off while only 20% of over 55s felt the same way. 
  • Geography - Londoners have had the biggest boost with 33% feeling better off compared to only 19% in Northern Ireland.
  • Industry sectors - banking and insurance saw the most people feeling better about their finances (35%) while retail (23%) and transport (21%) had the fewest feeling flush.
  • Type of work - office workers (29%) are more likely to feel better off than manual workers (23%).  
  • Furloughed workers - perhaps unsurprisingly, these were least likely to feel better off. But even within this group, 19% reported greater financial wellbeing, the same percentage as those who work part time. This is, perhaps, a good indicator of the impact on those in the hospitality sector.

There will be crossovers within these groups but, in general, we can see a picture of those feeling better off. They are mostly:

  • people in the least impacted sectors, who kept working full time from home
  • those who didn’t have to pay for a costly commute, and
  • those who had a higher discretionary spend before lockdown.

If we look at who feels worse off, we find it is the opposite of what we saw above:

  • less wealthy groups that spend a greater proportion of their income on fixed costs
  • people working part time and in the retail sector
  • those in manual jobs, and
  • those who’ve been furloughed.
This might not be a surprise, but our research did reveal some interesting contradictions. As well as having the highest percentage feeling better off, the 18 to 24 age group also has the highest percentage feeling worse off (26%). And while London has way more people feeling better off than Northern Ireland, it’s tied with the province for the most feeling worse off (24%).

The polarity in these groups may well be down to the higher proportion of both Londoners and younger people employed in the retail and hospitality industries. Lockdown meant the flow of wealth into retail and hospitality stopped. Wealth remained within those sectors least impacted, as business travel, entertainment and shopping all ground to a halt.

Lower levels of confidence

Our survey showed that despite feeling better off, few felt their financial resilience had improved.

When asked if they agreed that they could cope with an unexpected financial event like illness or redundancy, 32% people agreed or strongly agreed in February 2020. This fell to 28% in August. In our youngest age group, the picture was far bleaker, with those feeling positive about their financial resilience crashing to just 14% of respondents. 

There’s no getting away from the fact that lockdown has been a reality check. An insight into life without work, albeit with the insulation of a blanket furlough system. However, if an individual finds themselves looking for work, there won’t be a furlough scheme. It may be that realisation that’s knocked our confidence.

I think we’re likely to see record amounts saved into ISAs this year as people who’ve not spent money see the value of a rainy-day account. Those who feel more confident – or already have three to six months net income saved – might decide to top up their pension. If nothing else, that may knock a few months off the length of time they need to keep working. 

Much will depend on what we perceive as our longer-term prospects. Decisions will come down to individual family circumstances.

What can employers do?

Employers have done a fantastic job of getting people saving for retirement and a minority have taken that further by offering additional workplace savings vehicles.

These include:

  • cash ISAs a rainy day or short-term savings account
  • stocks and shares ISA for longer term saving
  • an investment account for saving without tax advantages - this lets employees take advantage of allowances like the capital gains tax threshold or the dividend allowance
  • company share save schemes that help people save while giving them a stake in the company.

Employers can also help by providing financial education or pointing their employees at online resources and the government’s Money and Pensions Service.

In our survey, only a quarter of respondents felt their employer put any effort into helping with general financial planning. It might be the right time to offer a benefit that stands out from the crowd by helping employees get their finances on track.

Dale Critchley, Policy Manager for Workplace Savings and Retirement, is an expert commentator with over 30 years’ experience in a variety of roles within the workplace benefits market. He is an Aviva spokesperson specialising in issues relating to workplace pensions and is regularly featured in the media.

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