Cost of living report
The cost of living crisis is costing people an extra £441 in household bills, on average, compared to a year earlier.
The ‘kids and pets’ demographic
We know that people have been facing higher costs across a range of household bills, and our survey found that consumers have been paying an average of £441 a month extra on household bills in the last 12 months. This figure varies according to a range of demographic factors, such as where people live, their income levels, age and whether they have children or pets. In fact, our research shows that those with children and pets faced the highest rise in household bills, at £497 a month, on average.
Higher earners under pressure
Although an annual income of £40,000 to £80,000 should help insulate people from the cost of living rises, more higher earners reported finding themselves either overdrawn or having to borrow (35% versus 31%) at the end of the month compared to the sample as a whole.
The higher earners paradox
We know that people on a lower income spend a higher proportion of it on essentials, such as energy bills and food, and so have been particularly hard hit by the cost of living crisis. However, we also wanted to explore how people on a higher income have been affected and how they are responding to the higher costs.
Our research found that people earning between £40,000 and £80,000 have seen monthly outgoings shoot up by £560 a month in the 12 months to February, compared with the average person’s increase of £441 — a difference of 27%. Interest rate rises, food inflation and energy costs were all significantly higher for those earning £40,000 to £80,000 a year. For example, the increase in housing costs among this group is currently outpacing the national average by 17% - or £244 versus £208 a month.
A higher income may mean higher heating bills as well. The same demographic saw average monthly energy bills rise by £155 compared with a national average of £141, a difference of 10%. Grocery bills for the £40,000 to £80,000 income bracket are also rising faster than the average household (£144 versus £122 a month).
Although an annual income of £40,000 to £80,000 should help insulate people from the cost of living rises, more higher earners reported finding themselves either overdrawn or having to borrow (35% versus 31%) at the end of the month compared to the sample as a whole. They are also more likely to put more of their spending on their credit card (13% v 10%), use a bank overdraft (11% v 8%) or take out a payday loan (7% v 4%) to help cover future increases in the cost of living.
One in six (16%) of those earning £40,000 to £80,000 a year have already used some or all of their savings to help pay for rises in the cost of living (compared to one in five – or 21% of UK adults).
Although higher earners have a higher level of savings than the sample as a whole (£14,446 versus £12,240), those who have dipped into their savings have done so to a greater extent than the national average (£2,690 versus £2,221), and it is, perhaps, surprising that one in five (19%) of those earning £40,000 to £80,000 a year say they could only afford an unexpected expense of up to £500, compared to 29% of UK adults.
While it’s fair and understandable that government help with the cost of living will be more targeted at those on the lowest incomes in the future, people on a higher income may be less financially resilient than we might assume; especially if interest rates continue to rise or take time to reduce.
Some groups were more likely to say they will stop or reduce their pension contributions; for example, people aged 25-34 (where 8% say they plan to stop their pension contributions and 9% plan to reduce them); those expecting a child (14% plan to reduce and 13% to stop pension contributions) and those with a young child aged up to six, where 8% plan to reduce and 7% to stop pension contributions.
Not surprisingly, a higher percentage of people in financial crisis plan to reduce (8%) or stop (11%) pension contributions, with slightly more of those who are close to financial crisis (11% and 10%) looking to make cutbacks or stop contributing to their pension altogether.
The two key takeaways from this are that the number of people stopping or reducing their pension contributions is still relatively low, and people are far more likely to focus on making changes to their day-to-day spending (such as eating out less, buying fewer clothes, buying less food and/or buying cheaper food) than they are to stop paying into their pension. The second insight is that more people say they plan to reduce or stop their pension contributions than actually do so.
Out of those who are planning to reduce or stop their pension contributions, almost half (47%) haven’t assessed the impact of doing this on their retirement income.
For some people on a tight budget, pausing their pension contributions may be the right thing to do. However, estimates show that 12 million people, or 38% of the working population, are not saving enough for their retirement.
We saw a similarly low number cancel or reduce their protection premiums, but the reasons for doing so were varied. Almost half of people said they could no longer afford it (45%), while 37% said it was too expensive. However, one in five (21%) said they were cancelling their protection policy because they had enough savings. Looking at this group in more detail, one in five currently has a mortgage and one in four (26%) only has between £250 and £1,999 in savings, so cancelling their protection policy could leave them exposed.
We know that people are making some very tough decisions about their spending, but by cancelling protection or making pension cutbacks today, there is a concern that some people may be leaving themselves financially vulnerable to the effects of a life shock, such as ill health, or increasing the risk of facing a cost of living crisis in later life.
Cost of living: 6 months on
6 months after this report was created, we have updated our survey to understand the impact the Cost of Living crisis is still having on UK households.
In October 2023 Cost of Living continues to be the biggest worry for UK consumers with 94% of those surveyed stating to be concerned by it. For more up to date insights view our latest data here.
Explore more of our guides
How to cut your bills
It’s always a good idea to regularly review your household bills to make sure you’re not paying over the odds. But it’s particularly important when the cost of living is rising. It will take a bit of your time, but you may be able to save some money by doing this.
How to make a budget and cut your spending
Budgeting is a great way to stay on top of your finances. Find out how to draw up a budget, increase your income and cut your spending in our money guide.