COVID-19 exposes emergency cash buffer shortage among UK workers

Tom Selby
11 May 2020

•    One in five UK workers had no emergency cash fund prior to the COVID-19 lockdown, new AJ Bell research reveals:
o    Women are more likely to have no emergency cash fund than men – 25% compared to 17% 
•    On average emergency cash funds were worth around 6 months’ salary:
o    But this is significantly lower for younger people with 18-34 year olds having an average of 4.5 months’ salary as a cash buffer compared to 10 months for people aged 55 or over 
•    Coronavirus sell-off demonstrates the value to people of all ages of holding a cash safety net:
o    On average people think it would be ideal to hold 9 months’ salary as a cash buffer now they have seen the impact of COVID-19

Tom Selby, senior analyst at AJ Bell, comments: 

“Millions of people in the UK were living on a financial precipice prior to the COVID-19 shutdown, with a fifth of workers admitting they had no emergency cash set aside whatsoever. 

“Sadly many will now be facing huge financial distress as a result of losing their job or being forced to take a pay cut.
“On-the-other-hand, some 61% of people have not seen a drop in income as a result of the current crisis, with over two-thirds saying they are also spending less money. 

“For those lucky enough to still have a job at the moment who have put off saving in the past, now could be the perfect time to build a rainy day fund. 

“As a general rule you should aim to have enough money in an easy access cash account to cover at least three months’ fixed expenses. This should ensure you can pay any unexpected bills, although some will prefer to hold more than this to protect against less common risks (including hits to the wider economy).”

Cash in retirement

“It isn’t just those in employment who should think carefully about the role of cash in their lives. Those taking a retirement income through drawdown might want to consider holding a cash buffer to ensure they aren’t forced to ‘sell on the dip’ in the event of a significant fall in markets.

“While there is no hard and fast rule when it comes to holding cash in retirement, having at least enough to satisfy 12 months’ income withdrawals is a sensible approach.

“However, it’s important to remember that while cash may not fall in value in nominal terms, its spending power will be eaten away by inflation if it is held for too long.”

Statistics based on nationally representative research of 2,002 adults in the UK between 24-27 April by Opinium and AJ Bell.

Survey results:
 

Which, if any, of the following has caused a drop in your income during the COVID-19 crisis?

 

Total

I’ve been furloughed

14%

Dividend income from my investments has reduced

8%

I’ve had to take a pay cut

7%

I’m self-employed/have my own business and have lost work

7%

I’ve lost my job

4%

Dividend income from my pension has reduced

4%

I’ve had to reduce the amount I am withdrawing from my pension

3%

Other, please specify

4%

NA – I have not experienced a drop in income

61%

NET: Has experienced a drop in income

39%

   

How much cash did you hold as an emergency cash fund before the COVID-19 crisis?

 

 

Total

None

21%

1 month’s salary

15%

2 month’s salary

14%

3 month’s salary

21%

6 month’s salary

13%

12 month’s salary

6%

24 month’s salary

2%

More than 24 month’s salary

8%

Average (Months)

6.3

   

What do you now think is the ideal amount of cash to hold as an emergency fund?

 

 

Total

None

5%

1 month’s salary

6%

2 month’s salary

9%

3 month’s salary

22%

6 month’s salary

28%

12 month’s salary

16%

24 month’s salary

5%

More than 24 month’s salary

10%

Average (months)

8.7

 

In which, if any, of the following ways are you saving money as a result of the lockdown?

 

Total

Spending less on everyday life (e.g. going out)

52 %

I don’t have to pay to commute

22 %

Delayed making large purchases I was planning to make

17 %

I have switched suppliers to cut my bills

8 %

Childcare costs have fallen

6 %

Have started a side hustle (i.e. a side line business / activity to make money)

5 %

I have re-mortgaged to a lower rate

4 %

Other, please specify

2 %

NA – I am not saving any money as a result of the lockdown

31 %

Tom Selby
Senior Analyst

Tom Selby is a multi-award-winning former financial journalist, specialising in pensions and retirement issues. He spent almost six years at a leading adviser trade magazine, initially as Pensions Reporter before becoming Head of News in 2014. Tom joined AJ Bell as Senior Analyst in April 2016. He has a degree in Economics from Newcastle University.

Contact details

Mobile: 07702 858 234
Email: tom.selby@ajbell.co.uk

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