Dealing with financial shock – and how protection can keep your accumulation plans on track

• Even carefully laid financial plans can easily be knocked off track by unexpected events, as the past few years have emphatically demonstrated.
• The importance of income protection and being able to make clear-headed decisions become even greater when household finances are under pressure.
• Investing with a purpose and having an adviser on hand can prevent short-term crises from undermining longer-term aspirations.

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Reminders that the unexpected can derail our plans at any time have been plentiful in recent years.

The ongoing ramifications of the pandemic continue to play out even as the COVID-19 threat slowly recedes, while the effects of the war in Ukraine and the biggest cost-of-living crisis in decades are creating further distress and disruption.

Rapidly rising food, energy and fuel prices have driven UK inflation up to a 30-year high of 7%,¹ and with a 40-year high of 8.7% forecast later in 2022,² many households are desperately seeking to reduce costs and shore up their finances.

That leaves even less room for dealing with the financial effects of unexpected events closer to home, such as illness, accidents, bereavement and unemployment. It can take just one unfortunate turn of events to threaten the most carefully laid plans, including the savings and investments being built up for the future.

Difficult choices

From raiding emergency savings and cutting expenditure to considering insurance products such as income protection, there are ways of protecting household finances.

But when times are tight, it can be very easy to make knee-jerk decisions that might not be the best course of action. That risk is exacerbated by the anxiety and fear around the financial outlook in many households, and the emotional challenges posed by life-changing events such as illness and bereavement.

“It could be family situations, such as the financial impact of having to quit work or reduce your hours to care for a family member, for example,” says Tony Clark, Senior Propositions Manager at St. James's Place.

Similarly, it could be a partner losing their job and leaving the household relying entirely on one person’s income. “One thing that often catches people out is what happens if they can’t work,” says Tony.

Is it worth getting income protection insurance or critical illness insurance?

Both are important, although they offer different types of protection. Income protection policies provide pay-outs to help cover outgoings such as mortgage repayments, rent and bills in the event of being unable to work because of illness or an accident. They will cover you for a set amount of time (usually until you retire) and you’ll be paid until you’re either able to return to work or until you reach the end of the term.

Critical illness insurance policies can be complementary, as they provide a lump sum on the diagnosis of certain critical illnesses or medical conditions. This can provide a much-needed financial boost if you’re unable to work or decide you don’t want to.

Yet almost eight in ten of us have no protection insurance policy in place, while 60% have no life insurance, according to the latest Scottish Widows UK Household Finance Index.³

“People will immediately think of protecting themselves in terms of critical illnesses, but insuring your income that’s funding your savings and investments is particularly important,” says Tony.

Eyes on the prize

Lower spending on non-essentials and reduced energy usage are currently the most common ways of cutting costs, according to the Office for National Statistics,⁴ and 42% of people don’t expect to save anything over the coming year.

Preventing short-term pressures from sending longer-term plans off track is difficult at the best of times. Tony suggests ensuring you have access to short and medium-term funds so the money set aside for later-life plans can be left alone.

“If you have a rainy-day fund, you can turn to this first rather than undermine your longer-term investments,” he explains. “This way, you're protecting your longer-term objectives.”

It can be easier to do this when you have a purpose in mind for those longer-term investments, such as being able to retire at a certain point, provide for other family members or simply making sure you have options open to you.

“If you know why you’re investing, it really helps to keep it going when things are tighter and to prevent you from making hasty decisions you might later regret,” says Tony.

Another perspective

It’s easy to fall into the trap of short-term thinking during times of stress, especially when there’s no one to provide a broader perspective. This is one of the many reasons why being able to turn to a professional financial adviser can provide invaluable peace of mind.

“An adviser can look at your overall plan with you and identify where to free up funds to help you in the interim period without your longer-term plans being disrupted,” says Tony.

An adviser can also offer a second opinion and help work out the best course of action when events take a sudden turn.

“Lots of decisions are made at challenging times, so an adviser can take the emotion out of it and see clearly what the best way forward is,” Tony adds.

The value of an investment with St. James's Place will be linked directly to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

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Sources:

¹ Consumer Price Inflation, UK: March 2022, Office for National Statistics, April 2022

² Overview of the March 2022 Economic and Fiscal Outlook, Office for Budget Responsibility, March 2022

³ Scottish Widows Household Finance Index, Scottish Widows, April 2022

⁴ Public Opinions and Social Trends, Great Britain: 30 March to 24 April 2022

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