Throughout the pandemic resilience has increased but not evenly so, highlighting real issues for the industry to address in 2022. As energy prices rise and national insurance is set to go up, how can those already vulnerable protect their savings?

Financial resilience, the ability to withstand income shocks in the short and longer term, has risen over the past year in British households according to research by investment platform Hargreaves Lansdown and economic forecasters Oxford Economics.

The score of resilience, as calculated using the savings and resilience barometer, has risen to 57.7 out of 100 over the past year compared to 54.5 in 2019. But with inflation and interest rates squeezing household finances, the report predicts this score will fall back to 56.2 by the end of the year.

A third of the UK doesn’t have access to savings that would cover at least three months of essential expenditure. Hit hardest in this area are the self-employed, as the research showed that employee households scored 16.5 points higher than self-employed households.

In addition, fewer than half of families were found to have combined assets and life insurance that would cover mortgage liabilities and the future living costs of their children.

Chief executive of Hargreaves Lansdown, Chris Hill, says investing can help significantly: “If we are serious about improving financial resilience for all, we need to make saving and investing an everyday activity.” But 14.1% of British households do not hold any investments, despite having highly liquid savings that could cover at least six months of essential spending.

Less than 40% of working-age households are on track for a pension income of £26,000 – the current average. Even among high income families, a significant number are not on track for pension savings, and almost half do not have enough life cover to protect their families. 

“Pension adequacy is a huge issue, and the report paints a stark picture of the number of households in the UK that don’t have enough pension savings to give them a decent income in retirement,” said managing director at Legal & General Retirement Solutions, Emma Byron.

A period of enforced expenditure restraint due to social distancing measures and multiple lockdowns resulted in the opportunity for households to collectively deleverage and build up their savings.

But these changes were highly uneven across society. The report estimates that whilst high-income households reduced their expenditure by 14.6% on average during this time, low-income households saw their spending flatline.

“While our overall resilience increased during the pandemic, there was a world of difference in the experiences of those whose outgoings fell, who were able to save, and those who lost income. Those on lower incomes... all faced major challenges to keep their head above water,” said senior personal finance analyst at Hargreaves Lansdown, Sarah Coles.

The report also revealed that there is a significant problem with lower-income households and managing debt. Over 15% of those on lower incomes are already behind on their bills or non-mortgage debt, which is four times more than the national average.

“The ‘big squeeze’ could crush half of the breathing space we built during the pandemic, with higher inflation, falling real wages, rising taxes and interest rate hikes putting a major dent in our financial resilience. For those who struggled through the pandemic, this is the last thing they need,” said Coles.

HL and Oxford Economics have now developed a savings and resilience comparison tool. The tool allows users to identify people in the same boat as them and understand their strengths and potential weaknesses.

“The pressure continues for people to make private provisions, but we also need legislative change to support them in this journey. Concepts like personalised guidance or the proposals to reform auto-enrolment and calculate contributions on the first £1 of earnings are steps in the right direction,” said Byron.

Hill said that financial education can also help to build resilience. “The financial sector can play an important role here. One vital step forward would be changes in the rigid advice rules to allow firms to give people simple, more personalised guidance and nudges to help them improve their financial outcomes,” he said.