A recent Office for National Statistics (ONS) study has looked at the effects of the cost of living crisis on UK adults. With households forced to choose between eating and heating over the Christmas period, the survey looked to catalogue the true levels of energy and food insecurity.

Adults in rented accommodation, and with personal income below £30,000 a year, were found to be most susceptible. Those aged over 65 were least likely to be suffering from insecurity.

The cost of living crisis, though, is set to continue well into 2023. While inflation is beginning to fall, energy bills will rise from April (despite a drop in Ofgem’s price cap), and the cost of borrowing remains high.

Revisiting your own financial resilience will be key to staying secure and comfortable this year. Keep reading for five steps you can take now.

1. Put money aside to cover emergency expenses

An emergency or rainy day fund is a key part of your financial resilience. It could be even more crucial in 2023.

Be sure you have around six months of household expenditure in an easy-access account so that you can get hold of it quickly in an emergency. A sudden expense, like a broken boiler or a car repair, will always eat into your income – and potentially more so currently – but with an emergency fund in place, you’ll have peace of mind that you are covered.

Remember, too, that with inflation still high, it’s important not to hold more than you need. Savings rates are low currently, which means that your cash savings could be effectively losing value in real terms.

2. Pay your future self by maintaining pension contributions 

You will likely have found that your outgoings have increased lately, at home and within your business. It might be tempting to cut your expenses in the short term by decreasing or stopping pension contributions. This is likely to be a mistake.

Pensions are extremely tax-efficient. You automatically receive pension tax relief on your contributions at the basic rate of 20%, with further relief available as a higher- or additional-rate taxpayer. This can be claimed via your self-assessment tax form.

You might also find you benefit from the “free money” of employer workplace contributions. With times hard, currently, you might consider salary sacrifice – whether as an employee or employer – as a tax-efficient way to make contributions.

The important thing, though, is to stay focused on your future self. Cutting contributions now means missing out on tax relief as well as the potential long-term investment returns and compound growth of a larger pot.

3. Don’t withdraw pension funds earlier than planned

Cutting contributions might be a bad idea, but, if you are at retirement age, what about withdrawing pension funds? The only question you need to ask yourself here, is “was this part of my plan?”

If your long-term plan doesn’t involve a pension withdrawal now, don’t make a withdrawal.

As with cutting contributions, you might solve a short-term financial issue but you could create much bigger problems further down the line. 

Taking a large sum from your pension could result in a higher tax bill, possibly even pushing you into a higher tax bracket. You’ll also need to think carefully about the pension option you choose, especially if you intend to keep contributing.

Some flexible options will trigger the Money Purchase Annual Allowance (MPAA). This reduces your Annual Allowance (the amount you can contribute to your pensions each year while still benefiting from tax relief) from £60,000 for the 2023/24 tax year to just £10,000.

You’ll also need to bear in mind that your financial plan is carefully calibrated to allow you to live the retirement lifestyle you want, for the rest of your life. Any deviation from that plan could jeopardize your dream retirement or leave you short of funds in later life.

4. Concentrate on short-term high-interest debt

Household budgeting has become harder for millions of UK households over the last 18 months. At Expert Wealth, our team of experts can help you or your loved ones manage your monthly income.

A simple list of incomings and expenses could help to highlight areas where savings could be made. This money can then be channelled into increased fuel bills, building or maintaining a rainy day fund, and paying off debt.

High-interest, short-term debt like credit cards or car loans can eat into your monthly income, so a targeted plan should usually look to clear these first. 

5. Do nothing with your investments and stay patient

A struggling UK economy and a fluctuating stock market might make you nervous about your investments. The best plan though is to keep calm, ignore the noise, and focus on your long-term plan.

Remember that an investment is always a long-term proposition, aligned with your long-term goals and your attitude to risk.

If your goals haven’t changed, your plans don’t need to either.

Get in touch

Financial insecurity is increasing for millions of adults across the UK, with ONS data suggesting no area of the country is immune. If you or your loved ones are looking for ways to tighten your purse strings, Expert Wealth can help.

With decades of experience, our Chartered Financial Planners have the expertise to help you stick to your long-term plans, whatever the immediate future holds. If you have any questions, please get in touch and speak to us today.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.