Biggest threats to personal finances in 2022 revealed

Investors most concerned about market crash and rising cost of living, interactive investor poll finds.

As 2021 draws to a close, many of us will be thinking about resolutions for the new year such as eating healthier and exercising more. The need to also consider factors that might affect your wealth has become particularly important amid one of the most challenging cost of living crisis in recent history.

A recent poll* by interactive investor among 1,900 website visitors, found that the rising cost of living is considered the second biggest threat to personal finances in 2022, cited by over a fifth (22%) of respondents, behind a stock market crash (56%), with tax increases (8%) ranking third.

Becky O’Connor, Head of Pensions & Savings and Myron Jobson, Personal Finance Campaigner at interactive investor, explore the potential threats to personal finances in 2022.

Stock market crash

Myron Jobson says: “It is unsurprising that our survey respondents are most worried about a stock market crash given the wobbles in global markets over the past week over the emergence of the Omicron Covid variant. Investors may feel that they are suffering from a bad case of déjà vu - and in many respects they are, as markets reacted similarly to other coronavirus variants.

“The challenge for investors is holding their nerve through rocky periods - and regular investing is the ideal way to do this. History might not be repeated but all the evidence shows us that markets grow over time, which bodes well for those who aren't seeking to withdraw their cash anytime soon.

“Volatile markets mean there may be more bad days than good days but avoiding knee-jerk reactions and maintaining a well-diversified and balanced portfolio can make all the difference.

“Regular investing can help you take a long-term view and avoid knee-jerk reactions. While over the medium to long term, lump sum investing tends to outperform, regular investing can help you sleep better and can help smooth out some of the highs and lows in the price of shares.”

Tax

Rebecca O’Connor, Head of Pensions & Savings, interactive investor, says: “Higher tax payments announced this year will really start to bite in 2022. Income tax band thresholds were frozen in 2021 until 2026. So was the Lifetime Allowance - the £1,073,100 limit beyond which pension withdrawals become liable to a tax charge.

“Freezing thresholds and allowances is a clever way of increasing the tax people end up paying without technically increasing taxes. That’s because as salaries increase, more people are dragged into pay higher rates of income tax. Pay has been rising relatively quickly this year in the aftermath of the pandemic, according to the ONS, which for the Treasury, means more people paying more tax.

“Similarly with the Lifetime Allowance, the more investment growth a pension pot experiences and the more contributions someone makes through their pay, the higher the likelihood that they will end up paying a tax charge on withdrawals.

“Salary increases will bring more people into paying the 20% basic rate of income tax, which you start to pay once you earn more than £12,570 a year. Anyone whose salary rises above the higher-rate income tax threshold of £50,270 will end up paying 40% tax on a higher proportion of their earnings.

“The new Health and Social Care levy adds 1.25% on top of current National Insurance contributions for all workers from April 2022.

“These are noticeable amounts of money and households will feel the tax squeeze – it won’t be a simple case of absorbing the rises. With inflation and other pressures hitting households, people may find they have to budget more diligently to pay their taxes.

“The first tax payment pay point of the year will be when tax returns are due in at the end of January.

“For those paying tax via PAYE, it’s worth comparing payslips, especially if you’ve had a rise, to see how much your tax bill has gone up.”

Rising cost of living

Myron Jobson says: “Rising inflation, which is at a 10-year high, spiralling energy costs fuelled by a supply shortage, as well has higher fuel prices have all combined to create a perfect storm for personal finances - and there appears to be little respite for consumers.

“Planned National Insurance increases next year puts further strain on incomes, with workers set to pay 1.25p more in the pound from their wages. The change is set to come into effect in April, the point when energy bills are expected to increase even further. To make matters worse, wages are failing to keep up with rapidly rising prices.

“The crisis is hardest for the poorest families who allocate the bulk of their spending on food and energy bills, and perilous for those without the cushion of savings to fall back on. It’s vital people think about how the rising cost of living could impact their financial well-being and consider what protective steps are necessary to take now to avoid money worries later.”

Interest rates

Myron Jobson says: “Interest rates are widely expected to rise imminently to tackle rampant inflation, which surged to a 10-year high in October at 4.2% - more than double the 2% target. Savers could be forgiven for thinking this means that the era of rock-bottom savings rates could soon come to an end. However, while many banks and building societies were quick to pass on cuts to the base rate to savers in the past, the same might not happen to bolster savings rates.

“The market expects interest rates to be nudged slightly upwards - from 0.1% to 0.25% - but are still likely to stay low by historical standards for a long time. So, while there might be a slight reprieve in savings rates, it is unlikely to be anything to shout about. Even so, it is still worth shopping around for the best savings deal to get your money to work harder for you. Those contemplating opening a long-term fixed-rate account might want to consider where they think interest rates will go in the near future as they would be unable to switch to a better payer until their fixed term has ended.

“When it comes to mortgages, the 850,000 UK mortgage holders on a variable rate deal will feel the immediate effect of higher interest rates as their rate is linked to the Bank of England’s base rate. For those on a fixed-rate mortgage deal, new interest rates don’t apply until the end of their fixed period.

“The past couple of weeks has seen the withdrawal of cheap fixed-rate mortgage deals, however, mortgage rates are still low compared to yesteryear, and there are still many competitive deals in market. Anyone looking to buy or remortgage in the near future should consider securing a deal now. Mortgage deals are often valid for a number of months, and it is not too early to start looking for the best deals now.

“For some homeowners, funnelling some of the savings to overpay on their mortgage is a no-brainer and a great way of saving a substantial amount in interest. There are limits on how much you can overpay and there might also be charges, so you should check with your mortgage provider first.”

Notes to editors

*The poll was conducted among 1,900 interactive investor website visitors between 26 and 29 November.