Coronavirus: how to manage your personal finances if money is tight

We share ideas for getting through the coronavirus pandemic whether you are a furloughed employee or a self-employed person seeing their work dry up.

More than nine million households have seen their income fall as a result of the Covid-19 outbreak, according to research by comparison site GoCompare. Many of them are concerned about job security and their ability to meet financial commitments in lockdown.

Whether you are a furloughed employee, a self-employed person seeing their work dry up, or a retiree concerned about stock market returns, it is important not to panic. “The Government has put together a package of financial help and there are steps you can take to rearrange your finances if income’s tight,” says Martin Parish, area director at Aon. “But before you do anything, consider both the short and long-term implications for your finances.”

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Income support

A key part of the Government’s support package covers income. At the heart of this is the coronavirus job retention scheme, which is a grant for employers covering 80% of a furloughed employee’s wages, capped at £2,500 a month, plus employer national insurance and pension contributions at 3%.

It is set to run until at least the end of June, and based on the initial wave of applications, will cover around one million people. “Employers can top up income to the full amount, and many are doing this, but a lot of people will find themselves on 80% or less of their normal income,” says Gavin Jones, chartered financial planner at Old Mill.

A similar scheme is in place for the self-employed, giving them access to a grant that pays 80% of trading profits capped at £2,500 a month. To qualify, trading profits need to be no more than £50,000 in the 2018/19 tax year or the average of the three tax years from 2016 to 2019. With both schemes, any money paid is subject to tax and national insurance.

Jones adds that some people will not be covered, typically because they joined a company after the cut-off date (19 March) or because their normal self-employed income is too high. For these employees, and for self-employed people who have seen their income plummet, it will be necessary to claim benefits such as universal credit.

Insurance cover

The unexpected nature of the pandemic means it is exactly the sort of event where insurance should step in. Charlotte Nixon, mortgage and protection proposition director at Quilter, says it is worth checking if you have cover. “Accident, sickness and unemployment (ASU) policies and some income protection plans will have cover for unemployment if you’re made redundant, but you’re unlikely to get anything if you’re being furloughed.”

Business owners are also finding themselves left out in the cold. Where they have taken out business interruption policies, cover is usually for downtime resulting from damage caused by perils such as fire, flood and theft.

Only a small number of policies include interruption due to disease, with these policies usually stipulating the diseases that are covered. Unfortunately, it is unlikely that Covid-19 is one of the named diseases.

Mortgage holidays

There is some relief for homeowners and landlords, with a mortgage payment holiday being part of the Government’s support scheme. Under this, mortgage holders can apply for a break of up to three months on their repayments.

Nixon says it is really easy to do as most lenders have implemented online processes. “If you take a holiday, interest will still accrue on the loan, which will mean either the term is extended or your payments are increased,” she adds.

As it is not free money, it is worth checking how this would affect your finances. For example, according to Moneysupermarket’s online calculator, someone paying £750 a month on a repayment mortgage at 3.59% with 10 years outstanding, would see their future monthly payments increase by around £23 if they took a three-month holiday.

Jones says the decision will come down to individual circumstances. “If you can keep paying, do, but if not, it’s a cheaper option than borrowing on a credit card or loan.”

Payment holidays are also available on loans and credit cards. Again, though, although it will not affect your credit score, interest will still be added to what you need to repay. Mitch Hopkinson, family wealth manager at deVere United Kingdom, suggests some other options: “You might want to look for a credit card with a 0% interest rate or speak to your bank about an overdraft. They are offering £500 overdrafts with no interest for three months as part of the response to Covid-19.”

Pension decisions

Another area where a holiday may be tempting is on pension contributions. Hopkinson says it’s not ideal, but worth considering if money is tight. “If you’re young, you’ve got time to catch up,” he adds.

In favour of keeping up contributions is the fact that, with the stock market falling so much, it is potentially a great time to be investing. But, Hopkinson adds, there is no guarantee share prices will not fall further.

As well as decisions around building up a pension fund, there is the possibility of drawing on it. Anyone aged 55 plus could use their pension pot to supplement or replace income; but Parish advises caution. “If you do need to access your pension early, make sure you don’t inadvertently activate the money purchase annual allowance,” he explains.

“This reduces the maximum you can pay into your pension and receive tax relief, taking it from £40,000 a year to just £4,000. If you still have plenty of years of potentially making pension contributions ahead of you, be careful.”

There is also a danger that with the stock market down, you will be committing the investment crime of selling low. “The £10,000 you take out of your pension might have been worth £12,500 or more before the crisis,” Parish adds. “It might recover if left invested.”

Protection

Cancelling life insurance and other protection policies might save on premiums now, but it can have significant long-term implications. “Premiums are based on your age and medical history when you took out cover,” explains Nixon. “If you cancel, you’ll pay more and might even have exclusions on a new policy.”

Many insurers are looking at how they can support their policyholders in this time, with some following the payment holiday example set by the mortgage companies. As an example, LV= is offering a payment break to protection customers who are experiencing extreme distress and have seen their income fall.

Nixon adds that, even where an insurer has not announced special rules, it is worth contacting them if you are struggling. “Many will be able to help and  could waive premiums. There is usually a period of grace before a policy is cancelled, so do contact them.”

Other considerations

As well as focusing on the major financial pressures, lockdown could also be a good opportunity to spring-clean your finances. “Make sure you’re paying the least you can for everything from your utilities to your mortgage,” says Hopkinson. “This could help if money’s tight.”

It is also prudent to ensure that all your paperwork is in order. This could include checking the nominations on your pension schemes, ensuring any life insurance is written in trust, and making or updating a will. “Use the time to review your finances and check everything’s in order,” adds Parish. “These are worrying times, but it’s also an opportunity to learn a new skill, including managing your finances.”

Where to get help

Government gov.uk/coronavirus

Money & Pensions Service moneyadviceservice.org.uk/en/categories/coronavirus

Citizens Advice citizensadvice.org.uk/

Financial institutions such as banks, pension companies and insurers are also offering support through the crisis. Contact your own providers for more information.

Stay safe from the coronavirus scammers

Criminals are taking advantage of the crisis to trick people out of their money, so it is important to be alert to anything that might look unusual. Since the pandemic was announced, common examples of scams have included emails selling non-existent face masks and texts demanding fines for breaking lockdown rules.

With so many government support initiatives being launched, check any emails or texts you receive that appear to be related to these. If in any doubt, contact the organisation directly using a verified telephone number.

Scammers are also posing as banks, credit card and utility companies, offering payment holidays or financial help, as a ruse to steal your bank account and card details.

Their methods are likely to evolve, so be vigilant. Report anything suspicious to Action Fraud (actionfraud.police.uk or 0300 123 2040) and forward suspect emails to the National Cyber Security Centre at report@phishing.gov.uk.