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UK households saw their financial wellbeing deteriorate at the fastest rate since the second quarter of 2020 during Q4, according to the latest Scottish Widows Household Finance Index, issued today (Wednesday January 12) as surging living costs hit people’s pockets and led to the steepest fall in cash availability since the start of 2014.

The Index, which measures households’ overall perceptions of financial wellbeing, fell from 44.0 in the third quarter (Q3)  to 40.1 in the final quarter (Q4) of 2021, as household savings were squeezed to the greatest extent since Q4 2013. The latest survey also revealed a slight reduction in income from employment.

Worries about the impact of inflation meant that households were increasingly pessimistic towards their future finances over the course of 2022, with the respective seasonally adjusted index down from 49.2 to 43.8. In fact, sentiment was the most downbeat since the third quarter of 2020. Expectations in December were downgraded particularly sharply amid fears surrounding the new omicron COVID-19 variant.

Survey data covering UK households’ plans for the future highlighted that around 2 in 5 households (41%) were saving for emergencies during Q4, up noticeably from 1 in 3 (34%) in the first quarter of 2021. Other savings priorities were holidays/travelling (26%) and retirement (20%), although the former dropped from 29% at the start of 2021. Meanwhile, only 14% of UK households reported that they were regularly saving more for their retirement during the fourth quarter compared with a year ago, and 22% said less.

Unexpected expenses continue to impact some households’ cash flow. One in five (20%) of those surveyed during Q4 reported that they had faced unexpected expenses in the last month, while 14% had seen their household income decline. At the same time, nearly a quarter (23%) of UK households 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, highlighting a continued impact on some households’ financial resilience from the pandemic.

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 Q2 2020.

"With inflation soaring into the new year and cash availability at its lowest since 2014, households’ expectations of future financial wellbeing were the most downbeat since the third quarter of 2020.

“As a result, 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. With the emergence of the Omicron variant adding to uncertainty, households will undoubtedly be hoping that the impact to their finances is modest as we enter 2022.”

While UK households reported further growth of workplace activity during the final quarter of the year, many experienced a fresh reduction in income from employment, reversing the marginal gains in the prior quarter.

Worries surrounding job security intensified, particularly in December as a result of the Omicron variant, with sentiment the weakest since Q1 2021.

As rising living costs hit household budgets, pressure intensified on people’s saving and disposable income with both declining quicker than at any time in over the past 7 years. Only the highest earners added to their short-term saving pots during Q4, with lower earners struggling to put money aside.

At the same time, UK households recorded a renewed increase in demand for unsecured credit, such as overdrafts and credit cards, while reporting that their availability had declined at the fastest rate since the start of this year.