How to protect your finances for the cost of living crisis
INFLATION is rising, energy bills are soaring, furlough is ending, and Universal Credit is being cut.
Britain is heading for a cost of living crisis.
Millions of people across the country are about to be hit by rising prices, with energy costs soaring and grocery bills on the up.
Business secretary Kwasi Kwarteng has admitted that many families will now face the devastating choice between “eating and heating” this winter.
So how can you protect yourself as the cost of living crisis starts to bite?
We take a look at everything from your bank account to your bills to see how you can make sure your finances are in top shape.
Energy Bills
Gas and electricity prices are going up.
That’s bad news if you’re on your provider's standard variable or default tariff, or if your fixed deal is about to come to an end.
The energy price cap increases to £1,277 at the end of the month, adding an average of £139 to household bills.
As wholesale gas prices continue to rise, it’s predicted that bills will go up even further next year.
The standard advice in such a situation is to shop around for the best fixed deal.
But energy suppliers have been pulling their cheapest tariffs off the market as their own costs soar.
The most expensive fixed deal on the market is now an eye-watering £800 more than the energy price cap at more than £2,100.
Martyn James, of consumer rights site Resolver, said: “This is a nightmare scenario for households worried about their bills and budgets.
“It’s impossible for consumers to know what a fair price is at the moment. The only thing they do know is that they’re going to be paying more.”
What should I do?
Contrary to usual advice, the best thing for people to do at the moment is wait.
If you’re on the standard tariff then you’ll likely be getting a better price right now than you would from a fixed deal.
If you’re already on a fixed deal then you should be protected from the coming price rises.
Put a note in your diary for a month before your deal ends so you can try to shop around and lock in a good price ahead of time.
If you don’t want to shop around yourself, you can sign up to sites such as Look After my Bills or Switchcraft, which will find the best deal for you each year.
Phone, broadband and insurance
Energy bills may be almost unfathomable at the moment, but shopping around for your other household bills should be a little easier.
Many people have signed up to new services like Spotify, Netflix or Sky over the pandemic as they were spending more time at home.
Now is good time to consider whether you’re using all of these subscriptions and if you’re getting a decent deal for them.
Research by TopCashback found that on average we’re shelling out £105 a year on subscriptions we don’t use or think are good value.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “If you’ve consolidated media and broadband into one, this is one of the areas where people have the most success negotiating with their provider.
“If you haven’t switched in a while give them a call, tell them you’re thinking of switching, and see what they can do for you.”
What can I do?
Insurance is another area where it’s really important to shop around. Sticking with the same provider without querying the renewal price could mean you’re paying over the odds.
Coles points out that rules are set to change in January, which will mean providers have to give you the same price that they would a new customer, but that doesn’t mean the problem is solved yet.
Whether its car cover or home insurance, set a reminder in your diary or phone calendar around a month before your renewal is due.
This will give you time to shop around for a decent deal using a comparison site such as MoneySupermarket or Confused.com. You often get a better price by looking in advance rather than leaving it to the last minute too.
Supermarket shopping
Food prices are likely to go up, industry experts and government ministers have warned.
Inflation came in at 3.2% this month, and supply chain issues and driver shortages mean many stores are having problems keeping their shelves stocked.
Energy minister George Eustice confirmed that the Government has stepped in to bail out two carbon dioxide plants, which had shut down amid the gas price spike.
The move was made in a bid to help get supply chains moving again.
He said it would cost taxpayers “tens of millions of pounds” and that CO2 is set for a “big, sharp” rise by fivefold from £200 a tonne to £1,000.
He admitted that this will have a “modest” impact on food prices in stores but insisted it should be “negligible” for shoppers.
What can I do?
Shopping own brand products is one easy way to cut your grocery bill, and you should avoid being enticed in by offers for things you don’t really need.
Shoppers should also make use of loyalty schemes that can get them money off. Being a Tesco Clubcard user can help you make some serious savings.
Sainsbury’s has also revamped its Nectar card, and estimates a new personalised reward system could save shoppers up to £200 a year on products they already buy.
If you’re worried about the cost of your shopping, you can also get help from your local food bank. Websites such as the Trussell Trust can help you locate a food bank near you.
Parents may also be able to get free school meals for their children.
Banking and savings
Inflation rising isn’t just a problem for your supermarket shop.
As inflation rises, it eats into the spending power of your cash.
That means if you have £100 in the bank and inflation is 3%, in a year’s time the purchasing power of your money will have fallen to £97.
So it’s important to make sure your money is working hard for you.
But it's almost impossible to find a savings account to beat inflation at the moment.
According to MoneySavingExpert, the best easy-access accounts pay just 0.65% currently and you’ll get 1.33% if you tie your money up for a year.
If you save £100, that means you’ll earn interest of just 65p and £1.33 respectively over a year.
What can I do?
Some banks are offering you cash if you switch your current account. Currently, RBS pays up to £150, Santander £130 and Nationwide £125.
This week, JPMorgan Chase launched a UK bank account that offers market-leading interest of 5% on round-ups.
This is where your purchases are rounded up to the nearest pound, with the difference put in a savings account.
For example, if you made a purchase worth £1.63, it would be rounded up to £2 and 37p would be put in your savings to earn the interest.
The account also pays 1% cashback on your debit card purchases, so if you spend £100 you get £1 back.
Other cards that offer cashback include American Express’s Platinum Cashback Everyday credit card, which pays 5% cashback on your purchases for the first three months.
There’s no fee for having the card but it is a credit card, so you should be prepared to pay off your balance in full every month to avoid racking up costly interest charges.
Santander’s 123 Lite account is another option for cashback fans.
It charges £2 a month, but you get cashback of up to 3% on the bills you pay from the account.
Mortgages
Interest rates being at record lows is, at least, a good thing for homeowners or those about to buy a property.
Buyers can lock in to a mortgage rate of less than 1% at the moment.
According to MoneySavingExpert, a first-timer buyer purchasing a home for £150,000 with a 10% deposit of £15,000 could get a two-year fixed deal at 1.9%, or lock in for three years at 1.99%.
David Hollingworth, director at mortgage broker London & Country, said: "The good news for borrowers at the moment is that mortgage rates are at all time lows.
"That offers the chance to lock in at a competitive rate, which will not only help put stability into the single biggest monthly outgoing but also protect against rising rates in the future."
When choosing a mortgage it can make sense to speak to an expert.
Be sure to factor in any product fees and look at the total cost of the deal over the period, not just the headline monthly repayment.
What can I do?
If you are remortgaging, make sure you shop around and don’t just assume your current provider can offer you the best deal.
When your deal ends you’ll be put on the standard variable tariff, which is typically far more expensive than the best fixed-rate or tracker mortgage deals.
Put a note in your diary three months before your mortgage deal is up so you can start shopping around.
Many households took a mortgage holiday during the pandemic, giving them a break from monthly repayments.
This may have allowed for some breathing space, but it’s important to be aware that the interest on your loan still accrues while you’re not paying.
Mortgages holidays aren’t just something for pandemic years, though they are typically reserved for extreme circumstances and emergencies.
But if you are really struggling to cope with rising costs, it might be worth speaking to your mortgage provider to see if they will agree to a payment break for a set period.
Pensions
Pensions might not be top of your priority list if you’re struggling to pay the bills, but saving for the future is still important.
Millions of people are already facing an income shortfall in retirement because they are not saving enough, so you should keep putting money into a pension to help your future self if you can.
Automatic-enrolment means your workplace is likely contributing into your pension too, and it makes sense to take advantage of this benefit.
All employees over the age of 22, that work in the UK and earn more than £10,000 a year are automatically included in a workplace scheme
What can I do?
If you do need some breathing space however, you can arrange a pension contribution holiday.
Workers are entitled to leave their pension scheme at any time, and can do this by contacting the pension provider and opting out.
While it's best to make this break as short as possible, if you do forget to opt back in auto-enrolment rules mean you'll be automatically put back into the pension scheme after three years or if you move to a different employer.
Coles said: “If you’re absolutely up against it, then this is an option, but it’s worth considering whether there is any way you can afford to keep paying in.
“If you have a pension at work, by keeping up your contributions you unlock free money from both your employer and the government, so you shouldn’t be in a rush to give that up.”
Working from home
A lot of workers have reported being able to save more money while working from home over the past year or so, but with winter on its way, you might start to see your costs climbing.
And if a new law is passed, working from home could remain a permanent fixture for many people.
Being at home all day means the heating will be on more and you’re likely to be using your appliances such as the washing machine, dishwasher and kettle more frequently.
First off, make sure you do these four things before you turn the heating on. Bleeding the radiators and turning the thermostat down can save you money.
If you’re on a low income or receiving benefits, you could be eligible for the warm home discount, which gets you £140 off your bills during the winter months.
The cold weather payment is a £25 grant for people on certain benefits when the temperature drops below zero for seven days.
But simple steps like turning down the heating can help too. Every degree you dial down the thermostat saves you around £60 a year, according to GoCompare.
Meanwhile, draught-proofing could knock another £20 a year off your bills.
And don’t be tempted to leave your TV on standby or your phone and laptop plugged in when they’re fully charged if you’re at home all day. Doing so could add £35 to your energy bill.
What else can I do?
If you’re working from home on a regular basis you could claim tax relief, too.
Home workers may be able to get money off their gas and electricity, metered water, and phone and broadband.
You can’t claim the whole bill but you might be able to save a bit.
From April 6, 2020 workers can claim a tax relief of £6 if they’re at home without having to provide evidence of their costs.
Alternatively, you can work out the exact amount of costs you’ve incurred, for example by working out how many of the calls you made on your phone were business related.
But you’ll have to provide evidence such as receipts, bills and contracts.
You can check if you can claim through the Government website.
Tax relief works by reducing the amount of tax you pay, so you don’t get this money back directly.
Instead, if you claim the £6 a week relief and you’re a basic rate taxpayer who usually pays 20% tax, your tax bill is reduced by £1.20 a week.
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