Households’ financial wellbeing ‘deteriorates at fastest pace since early 2020’

Households’ financial wellbeing has deteriorated at the fastest rate since the early months of the coronavirus pandemic, according to an index.

The index, which measures households’ overall perceptions of financial wellbeing, fell from 44.0 in the third quarter of 2021 to 40.1 in the final quarter of last year amid worries about surging bills and the impacts of the Omicron variant of Covid-19.

It pointed to the sharpest deterioration since the second quarter of 2022, according to the study published by Scottish Widows.

Readings above 50 signal an improvement and readings below 50 indicate a deterioration in households’ wellbeing.

Concerns about the impact of inflation meant households were increasingly pessimistic towards their future finances over the course of 2022, Scottish Widows said.

Sentiment was the most downbeat since the third quarter of 2020.

In signs of a further squeeze on households, the latest survey also indicated a slight reduction in income from employment.

Around two-fifths (41%) of households were saving for emergencies during the fourth quarter of 2021, up noticeably from around a third (34%) in the first quarter of last year.

But saving for the “here and now” could be coming at the expense of saving for the longer term, as only one in seven (14%) households reported they were regularly saving more for their retirement during the fourth quarter compared with a year earlier – while 22% were saving less.

Unexpected expenses are also hitting households’ cashflow.

One in five (20%) surveyed during the fourth quarter said they had faced unexpected expenses in the past month, while 14% had seen their household income decline.

At the same time, nearly a quarter (23%) said they would have been likely to withdraw money from their pension if they could have, rising to 27% for those aged between 35 and 44.

Emma Watkins, managing director of retirement and longstanding, Scottish Widows, said: “It was a challenging end to another year dominated by the coronavirus pandemic for UK households as rising living costs pinched the pockets of people in the fourth quarter, causing finances to deteriorate at the fastest rate since quarter two 2020.”

She added: “The strain on current finances has had a knock-on effect to future financial planning. One in five are not currently saving any money, slightly up from the same time last year, and almost a quarter would now consider withdrawing from their pension early if it was possible.”

– The quarterly index is compiled by IHS Markit and is based on a monthly survey of around 1,500 people aged 18 to 64 across the UK.