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The Cost of Living Crisis in 2023 has been an important reminder that a strong financial “safety net” is needed by households – helping to prepare for difficult times. Sudden tragedies such as illness, injury, death or loss of employment can happen to anyone, potentially undermining your financial stability. Financial protection is the key pillar in your financial plan to help you mitigate the risks of such scenarios. Below, our financial planners at Cedar House explain some of the key types of financial protection to be aware of. Do get in touch if you want to explore any of these options in more detail and access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
Savings rights
Before delving into different types of insurance, it helps to know what your rights are should you encounter money problems outside of your control. Firstly, the Financial Services Compensation Scheme (FSCS) protects up to £85,000 of your money in a given bank (or banking group) if the provider goes bust. Those with significant savings, therefore, should check that the provider is qualified for the FSCS. You might also consider putting any savings above £85,000 in another FSCS-qualified account held in a different banking group. For example, suppose an individual has £100,000 in her bank account. She could move £15,000 into a separate bank or invest this amount into an FSCS-covered scheme such as Premium Bonds.
Spending rights
If you spend over £100 using a credit card then your purchase is protected under Section 75 of the Consumer Credit Act. If there is a problem (e.g. the seller runs off with your money) then your card company has a legal duty to act. You may be able to get your money back. Debit card payments are not covered by Section 75, however. So, you might consider using a credit card to pay for “higher-ticket” items such as a new card or for a holiday, just in case. Be careful to pay off the credit card purchase immediately, however, to avoid the risk of running up debt.
Pension rights
If you have a final salary (or “defined benefit”) pension then it is likely covered by the Pension Protection Fund (PPF). You can check whether your scheme is registered with the PPF using their official register. The purpose of the PPF is to protect those with a defined benefit pension if their employer – who provides the pension income – goes bust. Those with a defined contribution pension (e.g. a pension “pot”) should be fine if their employer becomes insolvent, since funds are managed by a separate pension provider. For complete peace of mind, however, consider speaking with a financial adviser to check how your pension is protected in case of disaster. For instance, your rights can vary depending on the type of pension you have, whether the Financial Conduct Authority (FCA) regulates it and where your savings are.
Short-term “safety nets”
With inflation running high in 2023, it is generally unwise to hold too much wealth in cash as this will be disproportionately eroded, in real terms, over time due to poor returns from low savings interest. However, it can help to have 3- months’ worth of living costs stored in an easy-access account in case of emergencies (e.g. a broken boiler). This helps to avoid your need to turn to credit, although this may be necessary in rare cases. Having a good credit score can help you access better rates if you need to turn to this option. You could also check different overdraft options to see how the annual interest rates (APR) compare with different credit card options. In 2023, overdraft interest rates range from 19% to 40% or more. However, as a general rule, try to avoid relying on credit or your overdraft. The FCA has found that most people underestimate how much they use these options and how much they cost them. Instead, consider building up a cash “emergency fund” to see you through temporary financial setbacks.
Insurance options for financial protection
By law in the UK you must have motor insurance if you drive a vehicle. Employers must take out Employers’ Liability (EL) insurance if they start employing staff. These laws are intended to help protect all parties involved in a potential incident. You are not required to take out many types of insurance related to financial protection such as income protection, life insurance and critical illness cover. This does not diminish their potential importance, however.
If you have a mortgage and/or dependents like young children, then it is wise to consider life insurance. This helps to protect your loved ones if you die prematurely – potentially enabling your partner to pay off outstanding debt(s) and see the family through the following months as they re-establish some level of stability. Other households might benefit from income protection – particularly if an earner is self-employed and could face a reduction or loss of income if they suddenly become injured or ill, unable to work for a long time. This policy type offers another temporary source of income if this happens. Critical illness cover provides a lump sum if you are diagnosed with a condition specified in the policy – e.g. a heart attack.
There are many types of financial protection insurance even within each of these categories. Speak with a financial adviser to ensure you have the most efficient, comprehensive cover for your needs.
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk