Covid-19 has impacted the financial aspects of many people. It’s easy to assume that this impact has been devastating. However, the Money and Pensions Service’s recent analysis of Covid-19’s impact on UK households revealed some insightful and unexpected outcomes.
In January 2020, the Money and Pensions Service set out a ‘UK Strategy for Financial Well Being’. The strategy aimed to improve individuals' financial wellbeing through educational partnerships and collaborations with the private sector, employers, Government, and financial services. The wellbeing strategy is underpinned by the following goals:
- 2 million more people to be able to access debt advice.
- 2 million fewer people regularly using credit to pay for essentials.
- 2 million more working-age people to save more regularly.
- 5 million more people to be able to plan for financial stability in later life.
New analysis from the Money and Pensions Service takes into account how Covid-19 may have impacted how these goals will be achieved, and takes a wider look at how the pandemic affected the nation's finances.
How has Covid-19 impacted the UK?
As of March 2021, the Office for National Statistics reported that the UK's GDP production remains 7.2% below the level recorded in February 2020 but still up 1.2% against January 2021. Whilst overall GDP and production levels are gradually increasing, this has still had a knock-on effect for UK households.
The Money and Pensions Service's review revealed the catastrophic and surprising impact of Covid-19 on finances. The Money and Pensions Service billed this as ‘The 3 D’s of Covid’ and the impact of the pandemic:
- Has been divisive.
- The financial impact has been deferred.
- Consumers have increased their use of digital skills in relation to their finances.
The impact of working from home
It is easy to assume that Covid-19 has impacted many people's finances negatively. However, the Money and Pensions Service's review found that those on higher incomes could better adapt to working from home.
Working from home and lockdown allowed individuals to potentially:
- Significantly decrease or even eliminate commuting costs
- Reduce the cost of socialising and eating out
- Reduce spending on holidays
- Reduce expenditure on childcare costs
- Maintain their income overall
The review also found that those working from home had managed to build up their savings and pay down borrowing.
Working from home, however, brought financial challenges. Home workers needed to spend more money on their weekly shop and heat their homes for longer.
The impact on hospitality and lower-income workers
Those who could not work from home (such as those working in hospitality and retail) found their incomes suffered. A reduced income due to job losses or furlough combined with increased essential costs (food, energy, rent, or mortgage) meant that this group struggled during the pandemic. Many lower-income workers lost all their work or were unable to work due to childcare commitments, illness, or caring responsibilities.
The review especially noted that those most affected by a loss of income were single parents, ethnic minorities, and young people aged 18-25.
Debts only deferred
Interestingly, the demand for debt advice fell after the first lockdown due to many of the supportive schemes available.
The combination of the Government’s furlough scheme and lenders considering payment holidays on mortgages, credit cards, and loans gave consumers a much-needed break. Emergency legislation also prevented landlords from evicting tenants with rent arrears.
However, as lockdown is easing, many of these payment holidays and schemes are coming to an end. The impact of repaying debt has only been deferred as a stress for many individuals and families. Loans and loan repayments will likely have increased, and landlords will now pursue unpaid rent.
The drive to go digital
As face-to-face services ceased, the UK had to adapt to many new conditions. Demand for home office equipment increased due to homeworking, and people needed faster internet to keep up with homeschooling and online meetings.
The pandemic led to many habit changes, with a greater uptake of online shopping and contactless payments amongst older consumers. Online shopping had its best year yet during the pandemic. With little else to do at home, online shopping accounted for a lot of time spent on the internet.
The digital divide in education
Lockdown meant that many children had to access learning materials online. Poor internet connection and a lack of access to computers put many lower-income children behind their peers. 39% of Private school students were able to access more than five hours of learning per day compared to 12% of state school students.
What are the key impacts of Covid-19 on households?
Covid-19's impact on life is controversial, as many households have benefitted by being able to save. In contrast, many more have struggled to keep afloat. The Money and Pensions Service's analysis shows that more resources are needed to support UK households as we move past the pandemic.
More individuals will need to access debt advice. More services will need to invest in digital platforms to meet this demand in the next 12 months.
Despite the impact of Covid-19, many individuals and families have started to save regularly. However, the delayed impact of debt repayment and an ever-changing economy could reduce the capacity to save.
Lower-income consumers could face more challenges in managing their debt accumulated during previous lockdowns, may need more support with debt advice, and struggle to save money. Consumers may still be turning to more borrowing solutions as schemes come to an end.
Job instability and reduced confidence in making financial decisions may impact consumers' plans for their future. Furlough will have resulted in a reduction in pensions for many individuals. As only 80% of wages were being paid, pension contributions decreased. Instability in the financial markets also means that consumers will need to know more suitable pension products and investment schemes.
What can you do based on this analysis?
However Covid-19 has impacted your household’s finances, there still is a lot you can do.It is always worth reviewing your current financial situation and your future plans. It is difficult to plan for every unpredictable change, but you can work to understand your spending habits and create a budget. Aim to develop an awareness of the resources and help available such as debt advice management. This can ensure you're on the path to financial security despite the ups and downs of Covid-19.