14 January 2025
general
In August 2022, Formula 1 broadcaster Jennie Gow took out income protection, despite being young, fit, and healthy.
LV= reports that just a few months later, she unfortunately suffered a stroke. She said she was unsure if she’d be able to work again, but fortunately, her policy not only covered her income, but it covered her rehabilitation costs too. With that protection in place, she was able to slowly make her way back to work.
The likelihood of being unable to work due to illness or injury is higher than many realise, with the Office for National Statistics stating that over 2.5 million people were unable to work due to long-term sickness in 2024. The Guardian also reports that people born after 1945 are at greater risk of developing a chronic illness or becoming disabled.
While Statutory Sick Pay can offer some temporary relief, it has limitations and may not be enough to cover your total expenses. Some employers offer enhanced sick leave, but these policies may not cover the full term of your illness or injury. Moreover, self-employed individuals are particularly vulnerable, lacking access to these traditional employee benefits.
Being ill or recovering from an injury for a prolonged period of time could put you at financial risk. In turn, this could lead to financial stress, which the Mental Health Foundation states can impact your mental health and wellbeing.
Meanwhile, having protection in place, such as income protection or critical illness cover, could help offset these limitations.
Here are some of the financial risks you could face if you were unable to work, and what your adviser could do to help you build a safety net for yourself.
1. Being unable to cover essential expenses such as mortgage payments or utility bills
One of the most immediate financial risks of being unable to work is the potential of falling behind on essential expenses. Mortgage payments, utility bills, and even basic necessities can quickly become overwhelming without an income.
Missing payments could lead to late fees and penalties, and could potentially damage your credit score. For homeowners, there is also the risk of repossession. While there may be temporary solutions for some of these concerns, these could add up to more interest and higher overall costs.
For example, MoneyHelper states that if you take a mortgage holiday, your outstanding mortgage balance and payments will likely be higher than they were before the payment break.
This may lead you to access your savings to cover any shortfalls, but this may not be a long-term solution.
2. Depleting savings to cover everyday expenses
For many, the immediate response to a loss of income is to draw on their savings. While this can provide a temporary buffer, it’s important to understand how quickly you could deplete these funds.
Even a substantial savings pot or rainy day fund can dwindle quickly when you aren’t covering your outgoing costs with an income. This could leave you in a precarious position, with no safety net remaining.
For example, according to Finder, the average person in the UK has £11,185 in savings. However, 46% of Brits have £1,000 or less.
Compare this to reports from uhomes.com, which state that the average monthly expenses for a single working individual in the UK are between £1,220 and £2,350. This rises to between £2,150 and £4,400 for a family of three or four.
So, if you have prolonged time off, you might struggle even if you have a larger savings pot.
3. Pausing pension contributions, stalling growth, and jeopardising long-term goals
If you’re in a pinch financially, you might consider pausing your pension contributions. However, this can have a significant impact on your future financial security.
Remember, even a small change now can have profound effects on your retirement savings in future. Compound interest can add up quickly, and retirement funds grow because investments could earn returns on themselves.
For example, the Institute and Faculty of Actuaries (IFoA) states that opting out of your pension between ages 55 and 60 could cause a £100,000 reduction in your pension pot. Opting out from 35 to 40 could have an impact of £206,000.
By pausing your contributions, you’re potentially jeopardising your future financial security.
4. Being forced to borrow money to cover costs
If you deplete your savings, you may be tempted to borrow money to cover essential expenses, but this comes with its own risks. Borrowing in this way could include:
Each of these options carries its own risks, and taking on debt may add to monthly expenses, damage credit scores, and create a long-lasting financial burden, even after you return to work. Having support to supplement your income could help mitigate the risk of this happening.
5. Being unable to support family members who rely on you
If you have dependants, you may not be able to financially support them should you lose your income, even temporarily. A loss of income in this case might not only affect your ability to cover your own expenses, but might potentially put the financial security of your spouse, children, or elderly parents at risk.
The Office for National Statistics has reported that, of all families living in households, 43% had one or more dependent children. Additionally, there were 3.6 million young people aged 20 to 34 living with their parents in 2023. This highlights the importance of having a comprehensive financial plan in place, particularly one that considers the needs of all your family members.
Whether it’s income protection or critical illness cover, having the right policies in place means you can potentially circumvent the risks associated with losing your income.
6. Having to pull money out of investments to cover shortfalls
When income streams dry up, you may be tempted to tap into your investments and withdraw money. However, drawing funds out of investments, especially prematurely, could have a detrimental effect on your ability to achieve your long-term goals.
If you access investments during a period of market volatility, you might turn a paper loss into a real one and essentially “lose” money. You also risk the future growth potential of those funds, as they’ll no longer be invested.
Talk to your adviser before withdrawing any money to understand the potential long-term effects on your progress toward your financial goals.
Your adviser can help you build a financial safety net
Building a safety net for yourself involves more than simply saving money for a rainy day. It includes considering various types of protection options and financial strategies that could help cover your monthly expenses should the worst happen.
Having policies such as income protection or critical illness cover in place could help you focus on recovering, without having to worry about your finances.
Working with your financial adviser means you can build a comprehensive plan that suits your unique needs and circumstances, ensuring you’re financially secure should you become ill or injured.
Get in touch
Don’t leave your financial future to chance. Talk to us today and let us help you build a safety net to protect you and your loved ones from the unexpected.
Email enquiries@jesellars.co.uk or call 01934 875 919 to find out more about how we can help you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Note that financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
