The rising cost of gas and electricity is a worry for many UK households in 2022. In November 2021, the energy price cap (set by Ofgem) was £1,277. By April 2022, however, it had risen by 54% to £1,971. Now, projections suggest that the 12-month cap could reach £3,420 by October. By April next year, however, it could even rise to £4,200 (over 3x more than in 2020).
Understandably, such an outcome would leave households considerably worse off and will have a huge impact on the political and economic landscape. Below, we suggest how things could play out in the coming years and how this could affect your financial plan.
Less spending power
In December 2021, there were 29.5m payrolled employees in the UK and the average person earned £31,772 p.a in salary. Net of tax, this is £27,972. A yearly energy bill of £4,200 would, therefore, take away 15% of this take-home pay. The 2021 cap of £1,277, by contrast, might have taken closer to 4.57% of average UK net income.
Of course, many people do not earn the UK average salary. Recent graduates and part-time workers (e.g. parents), for instance, might earn a salary closer to £24,000. The UK’s poorest 20% of UK households had an estimated £12,798 of disposable income in 2018, making them very sensitive to energy price shocks.
By contrast, The UK’s richest 20% of households had £69,126 – putting them in a much better position to weather the storm. Other groups (by household income) had disposable income of between £21,000-£39,000. Naturally, a higher energy price cap will mean less money to spend in the wider UK economy. Most households in 2022-23 are likely going to need to make tough choices about where to cut back on luxury spending – such as overseas holidays, dining and digital subscriptions – as more income is devoted to covering essentials.
Implications for financial planning
Of course, no one has a crystal ball and anything could happen between now and April 2023. Maybe Russia pulls out of Ukraine and re-opens oil pipelines to the west, leading to a fall in global oil prices. Perhaps the UK government initiates a huge financial support package (like the furlough scheme during the Covid pandemic) to help households cope with their surging energy bills, although this would put considerable strain on the public finances.
Yet households cannot depend on such outcomes. Generally, it is wise to prepare for the worst whilst hoping for the best. Here are some ideas to get your wealth and finances in better shape before further potential rises in the energy price cap:
- Optimise your mortgage (likely your biggest monthly expense). Those on a variable rate might benefit from moving to a fixed rate deal, which is typically cheaper.
- Clear costly debts (e.g. personal loans and unpaid credit cards).
- Review your tax plan to ensure you are getting the most out of your income. Our recent article on this topic offers 5 ideas to help you here.
- Review your budget and eliminate needless spending – such as digital subscriptions or gym memberships that you hardly ever use.
- Get your protection plan up to date. Policies such as life insurance, critical illness cover and income protection can provide much-needed financial stability and support to your loved ones should the “worst happen” to you.
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This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).
