Cost of living crisis: you can cut your bills, but there may be pitfalls

You may be able to reduce or take a break from monthly mortgage, life insurance and pension payments

As the cost of living crisis deepens, you may be assessing your regular monthly outgoings and looking for things you can cut back on.

If you are lucky enough to be a homeowner, your biggest monthly expense is likely to be your mortgage. But will your lender allow you to reduce your payments if you explain that you are struggling? And how will that affect your credit record?

Similarly, if you have life insurance or a pension, can you take a break from your payments, and what will the consequences be?

Taking a break from your mortgage

According to UK Finance, the trade association for banks, mortgage lenders should offer “forbearance” to any customer who is in financial difficulty or unable to make their mortgage payments.

This could take the form of an authorised payment holiday, where your lender gives you permission not to pay your mortgage for a short period, usually up to three months. Alternatively, with your lender’s permission, you may be allowed to reduce your monthly repayments.

These arrangements come at a cost. Any payment holiday will be noted on your credit record, which could have implications the next time you want to borrow money – you may, for example, be charged a higher interest rate. You will also be expected to pay back everything you have missed paying once you are no longer in financial difficulty. Your mortgage is likely to cost you significantly more in the long run.

“The big downside of payment holidays is that you end up with a bigger mortgage to contend with when you do restart making payments,” says David Hollingworth of the mortgage broker L&C.

Every day that you don’t reduce the original sum you owe you will be accruing interest on it. Plus, you will have to make up the missing payments.

That means “you end up making a higher payment for the remainder of the mortgage – because you’ve got a bigger mortgage”, Hollingworth says.

What’s more, lenders are only likely to agree to a payment holiday if they think your situation is temporary and a short break will give you enough breathing space to get back on your feet. “They would want to be sure it was the right thing to do because it’s going to cost you more money in the longer run,” he adds.

Cancelling life insurance premiums

It may be possible to reduce your life insurance cover or take a short break from your payments, without it affecting your cover – but only if your insurer agrees.

LV= allows this – but you can only benefit if your policy (for income protection, critical illness or life insurance) has been in force for a year or more, you have a good history of paying and are less than three months behind with monthly premiums. You must declare that you have suffered a significant drop in your income or that your usual earnings have stopped. The payment break will only be offered for a month at a time, for up to three months.

There is no requirement for you to make up the missed premiums and your cover will remain in place throughout the payment break period. Afterwards, your premiums will go back up to your normal level and you will not be able to apply for another break after that.

Your insurer, if it is not LV=, may take a different approach. “If you are having problems keeping up your premium payments, the first thing you should do is contact your insurer to see what they could suggest,” says Malcolm Tarling of the Association of British Insurers. “They may follow the lead of LV= and say: ‘We can stop your premiums and you can have a premium holiday for a specific period of time.’ Or they may say you can reduce your premiums but you’d have to take a corresponding reduction in the amount of cover you have.”

AIG takes this second approach with customers who are in financial hardship. It will consider allowing you to reduce the monthly cost of your protection insurance for up to six months but you will not be able to take a complete break from your payments. Most importantly, during the period you are paying reduced premiums, the value of cover you have will be reduced.

For example, it says a 33-year-old with £250,000 of life cover, paying £21.86 a month, could reduce their payments to £4.17 a month for six months. However, the maximum that could be claimed during this six-month period would be only £10,000.

In other words, in this scenario, an 80% reduction in the cost of the monthly policy would lead to a 96% reduction in the value of cover, and would leave your loved ones £240,000 worse off if you died – while saving you only £17.69 a month. However, if £4.17 a month is all that you can afford and you want to keep some kind of cover in place, then this drastic step may be worth considering.

At the end of the six months, you can either stay on your reduced premium or increase it back to your usual level, with no further underwriting required. You will not be asked to cover the difference in payments when your premiums return to normal, and throughout the six-month period you will have access to AIG’s 24/7 health and wellbeing support services.

Cutting your pension contributions

You may also be considering reducing or stopping your pension contributions for a while. This may ease your financial pressures a little in the short-term but it will reduce your income in retirement.

“Staying in your pension and making regular contributions, if they’re affordable, is one of the greatest ways you can protect your future,” says Eve Read, a spokesperson for Nest, the not-for-profit scheme set up by the government to facilitate workplace pensions. “Especially if you save into a workplace pension, like Nest, as your employer will pay in money, and you get tax relief from the government, too – these extra contributions effectively double your investment.”

From April, the average household’s yearly energy bill is expected to increase by £693 a year or £57.75 a month, according to Ofgem. If you are a basic-rate taxpayer and you divert £57.75 a month from your pension contributions to your energy bill for a year, you will miss out on £14.45 in tax relief a month and £34.90 a month in employer contributions (assuming your employer contributes the minimum amount it can to your pension each month via auto-enrolment).

Cutting £693 a year from your pension will mean £1,284 less goes into your fund. If that money manages to grow by 5% a year until you retire, the long-term cost is even greater. Hargreaves Lansdown, an investment platform, estimates that a 40-year-old basic-rate taxpayer who cuts back on their pension payments in this way – reducing their contributions by only £57.75 a month for only one year – would end up £4,569 worse off, before fees, by the age of 67.

“It can be tempting to cut pension contributions when money gets tight but it is important to remember that you are losing more than just your own contribution,” Helen Morrissey, a senior pensions and retirement analyst at Hargreaves Lansdown, says. “Tax relief and the employer contribution give your pension a real boost, and along with long-term investment returns can have a powerful impact on how much you end up with in retirement.

“If you do find yourself in a position where you have to cut or stop your contributions, try to resume them as soon as you can.”

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