Cost of living crisis: financial challenges ahead

Cost of living crisis

This week it was announced that energy bills would increase by 54% a year for millions of people in the UK due to rising global energy prices. Combined with the recent rise in interest rates to 0.5%, a looming national insurance hike, and rising food bills, the UK is now facing a cost of living crisis. So, there are undoubtedly some big financial challenges in the year ahead.

In our recent blog, Rising inflation: what does it mean for your money? we explored the background behind the current rise in the cost of living and some of the triggers. Since then, Chancellor Rishi Sunak has announced a series of measures to try and tackle some of these issues. So, let’s take a closer look at what’s being proposed, along with some practical steps you can take to help reduce the impact of rising living costs.

Relief for households

Following a rise in the energy price cap, it’s been estimated that people could be paying an extra £693 a year from April 2022. Described by the think-tank Resolution Foundation as a “cost of living catastrophe”, the Chancellor has reacted to this urgent situation by announcing a £9.1 billion Energy Bills Rebate, whereby almost 80% of households will receive £350 to offset the rising cost of living, consisting of:

  • £200 off energy bills from October 2022 for all domestic electricity customers. However, this is just a temporary discount, and £40 per year will be paid back over five years starting in 2023.
  • £150 Council Tax rebate for those in bands A – D from April – this won’t need to be paid back.

We’ve all been a bit more conscious of our energy usage in recent years for environmental reasons, but now with the rising cost of living crisis, we may also be concerned for our bank balance too. One way to manage your household energy usage is to carry out an “energy audit” around your home. For example, do you have ‘vampire chargers’ or other plugged-in equipment, such as old fridge-freezers, which could be needlessly draining energy and adding to fuel bill costs?

If you don’t have a smart meter fitted, check whether your energy provider can install one in your home. Alternatively, you can buy meters that link to smartphone apps to help you track and manage your power usage.

Increased interest rates

The Bank of England has raised the interest rate to 0.5% to help tackle the cost of living crisis, directly responding to soaring energy bills. The reasoning behind this is to reduce the pressure on households by tackling the rise of inflation and making it less attractive for people to borrow.  In turn, people will spend a little less, and the cost of things should reduce. But there are always winners and losers when interest rates rise.

If you have invested in bonds, the price will fall. But if you have a diverse, long-term investment strategy in place and you have spread your level of risk, then you might benefit if the prices of certain stocks and shares increase.

Cash may also see the benefits of increasing internet rates, but it’s unlikely it will keep pace with the soaring inflationary rates. Review your savings accounts to see if you will benefit or be worse off due to the higher interest rate. At the moment, interest rates remain relatively low unless you are willing to lock away your money for a long period, and even then, the rates still aren’t very attractive.

Borrowing will be more expensive, so it’s probably not the best time to take out a new loan. Also, if you’re on a variable rate mortgage deal, the amount you pay in interest will rise with the Bank of England increase. If you have a fixed-rate mortgage that’s due to end in the coming months, it’s important to check whether you can get a better mortgage deal. If you have any questions or need help with your financial planning, please contact our team.

Tax freezes and rising National Insurance

Another factor contributing to the financial squeeze facing us in 2022 is the big tax freeze announced in the spring budget in 2021. In response to the pandemic, the government plan to freeze most major tax allowances from April 2022 until 2026. And, as inflation is now higher than first thought when the freeze was announced, this will mean more of our money will be subject to tax than anticipated.

The tax freeze combined with the government confirming they will continue with the plan to increase National Insurance by 1.25% in April means households will have even less money to go around.

How to combat the cost of living crisis

When inflation rises, daily necessities like fuel and food tend to rise. And when the rate at which our income increases can’t keep up, this can lead to a perfect storm for our finances. Everyone can benefit from making extra savings on their spending, so here are a few ways you can try to beat the cost of living crisis and rising inflation:

  • Scrutinise your outgoings. Reduce unnecessary subscriptions or haggle with your suppliers if you’re out of contract. Also, consider switching to a water meter if your usage is low.
  • Set a budget for your household spending, including non-essential items, and try to stick to this each month.
  • Technology is your friend when it comes to taking control of your finances – here we run through tech to help you manage your money
  • Plan ahead when it comes to your shopping, and limit the number of small trips you make to the local shop – you never just come away with milk as you intended!
  • Look at your fuel costs and decide on whether you can reduce your travel in any way. An eco-friendly tactic, which will also help reduce local pollution levels and your monthly outgoings.

The Bank of England has predicted that the average UK family will see their disposable income shrink by 2% this year. It’s thought that this will be the largest annual reduction in spending power since 1990. As a result, it’s essential to make sure you are prepared for any financial hit your household may face, no matter what income level you are on. Ensuring you have a robust plan in place will help you to protect your lifestyle and your retirement goals.

If you’re worried about the rise in the cost of living and the impact this may have on your savings and investments, get in touch to speak to our independent financial planners.