Around 35% of people have suffered from a financial shock so far this year, according to the latest Financial Lives survey by the Financial Conduct Authority (FCA).
The survey, which took place between February and June, found that 4.2 million people have missed bills or loan payments in at least three of the six months before they were questioned, while 7.8 million are finding it a heavy burden to keep up with their bills, up from 5.3 million in 2020.
Around 60% of UK households say they are now struggling with their bills, five times more than in 2020 at the height of the pandemic, with adults living in deprived areas seven times more likely to be in financial difficulty.
Tom Selby, head of retirement policy at AJ Bell, said it was no surprise that people are struggling, with inflation at a 40-year high and energy costs surging.
“This brutal inequality was the driving force behind the ‘levelling up’ agenda pushed so hard by former prime minister Boris Johnson but essentially abandoned by his successor Liz Truss. Sadly, things are likely to get worse before they get better, with millions of people facing rising mortgage costs this year as interest rates spiral,” he said.
Myron Jobson, senior personal finance analyst at interactive investor, added that the nation’s financial resilience is “on a knife edge” and said the survey was “desperately worrying”.
“It’s vital people think about how the rising cost of living could impact their financial wellbeing and consider what protective steps are necessary to take now. This may translate to doing an emergency budget, cutting down on non-essential spending and squirrelling away more money into a rainy-day fund if you can afford to do so,” he said.
As I have said in this column before, now is not the time to be rigid. If taking cash out of the market to survive the current climate is the best course of action, then it is what you should do, even if most financial theory tells us to look through the short-term noise and keep invested.
However, you should think carefully about where you get the extra cash from. Any savings held in current accounts or cash ISAs should be used first, followed by any money in Premium Bonds or a stocks and shares ISA.
Selby said someone aged 55 and over may be tempted to raid their pension, but that people should “think carefully” about this as taking taxable income from your pot will also trigger the ‘money purchase annual allowance’, severely restricting the amount you can contribute to your pension each year.
“While in some cases savers may feel dipping into their pension is the only option, it’s important to take the time to consider how decisions taken today will impact on your finances further down the line,” he said.
Importantly, you don’t need to struggle alone. There are free debt services available, and the FCA has told firms that they must work with their customers to solve any problems with payment.
The FCA report said discussing options and shopping around to find the best deal will be more important than ever, while its free MoneyHelper service provides more tips on how to live on a reduced budget.