Household financial wellbeing declined faster at the end of 2020 than at any time during the five years prior to the Covid-19 pandemic, according to the Scottish Widows UK Household Finance Index (HFI).

The headline seasonally adjusted index which measures households’ overall perceptions of financial wellbeing registered at 41.1 during the final quarter of 2020, unchanged from the third quarter reading and well below the crucial 50.0 ‘no-change’ threshold.

However, the decline in financial wellbeing was still softer than at the height of lockdown measures in the second quarter of 2020 (index at 37.8).

More positive news came from the survey’s forward-looking indicator for 2021, which signalled the least pessimistic outlook by households towards their financial situation in 12-months’ time since the three months to March, before the onset of the COVID-19 pandemic. The respective seasonally adjusted index was also above the long-run trend level and suggested that households’ financial expectations were relatively resilient in the face of renewed COVID-19 restrictions in the final quarter of 2020.

Jackie Leiper, Workplace Savings Director, Scottish Widows, said “Household savings are being severely squeezed for those hardest hit by the pandemic, with around one in five households saying that lower workplace income had made their financial situation worse at the end of 2020.’

“The continued pressure on families’ financial resilience and lack of protection leaves people in danger of saving less for the long-term and more for emergencies due to uncertainty over the immediate future.’

“Although finances are under strain, the latest fall was still much softer than in the three months to June, even in the face of stricter restrictions across the UK. Households may see some light at the end of the tunnel as we move into 2021 with the development of successful vaccines, but with a national lockdown underway, we are likely to see measures that have a severe impact on finances in the coming months as well as a delayed recovery in UK economic conditions.”

The survey highlighted that pressure on finances – from a fall in income and unexpected expenses has resulted in one in five people (20%) saving less for retirement in the fourth quarter of the year and (19%) would have been likely to withdraw from their pension during the same period if they had early access.

In terms of savings priorities, more than a third (36%) of UK households are saving for emergencies amid ongoing financial pressure and pandemic related uncertainty, followed by holidays and travelling (29%), retirement (22%) and home improvements (22%).

Meanwhile, the data shows varying levels of financial resilience, with more than one in five (22%) households able to pay for essentials for less than a month, and only 40% able to cover essentials – such as food and accommodation – for more than six months.

Despite this, the majority of households are potentially without sufficient financial protection, as less than half of all respondents (46%) either currently have life insurance or plan to get it within the next two years and a fifth (18%) have cover in the event of critical illness.

households recorded a further reduction in earnings from employment at the close of the year. The rate of decline eased since Q3,but was still sharp and this contrasted with rising incomes during the six years leading up to the pandemic. Similarly, households’ perceptions of their job security remained downbeat in Q4 as businesses continued to make redundancies amid the gloomy UK economic outlook. Nonetheless, the level of pessimism about job security was the weakest since Q1 2020.

Workplace activity declined for the third quarter in a row, according to survey respondents. The latest reduction was the slowest in the current sequence and only marginal overall.

There was further evidence that households were using savings to finance some of their purchases at the close of the year. Households recorded the sharpest deterioration in their savings since the final quarter of 2013, largely reflecting a sustained squeeze on income from employment during the pandemic. Latest data also showed that the amount of cash UK households have available to spend continued to decline in the final quarter of the year, with a further increase in demand for unsecured credit, such as overdrafts and credit cards.

Scottish Widows Household Finance Index