Coping with the real threat of a drop in income

THERE are times when the idea of a shorter working week sounds appealing. But reality has bitten in recent months, with more Scots being asked to work fewer hours for less pay as employers seek to cut costs.

More than half of all UK workers have taken a cut in pay, a reduction in hours or a loss of benefits since the recession began, according to the Keep Britain Working Campaign. And Keith Dryburgh, policy officer at Citizens Advice Scotland (CAS), said evidence from bureaux across Scotland indicated the struggle faced by workers coming to terms with smaller pay packets.

"Many employees are having their hours reduced, overtime is being refused and some people are even being asked to work longer hours – but for the same money," said Dryburgh. "We understand that employers are feeling the pressure, just like everyone else. But given the levels of personal debt many people are suffering, workers need all the money they can get, and so to see incomes falling at this time is very worrying."

For many people, particularly where they are the sole breadwinner in the household, the diminished regular income can make life very difficult, said Derek Smith, a director at Melvile Hutchison Financial Management in Edinburgh.

"Clearly, you need to think about your short-term cash flow and make a plan around how you will deal with your immediate fall in income," he explained. "If you have been well advised in the past you will have a cash reserve equal to at least a three month's net salary to fall back on."

Here are some of the main questions that may arise if you find your hours cut and income reduced accordingly.

Q How can I cut my costs? The biggest step you can take towards saving money is to make an honest list of your monthly expenditure and compare it with what you have coming in. This will help you identify where savings can be made, whether on energy and phone bills or groceries and transport.

Less regular expenses are also up for debate, said Max Horne, principal of IFA the Max Horne Group in Dunfermline. "Expenditure for luxury items becomes a habit after a while and this is a good time to break the habit and cut out those luxuries that have become the norm," he said.

Mortgages are another potential source of savings, said Horne. "One of the classic ways to reduce expenditure is to reduce the mortgage payments on a capital and interest loan to an interest only loan on a temporary basis."

Q I'm worried I might not be able to maintain my mortgage repayments

This is the biggest worry for many homeowners, so these payments should be prioritised above others, such as credit cards, given the potential implications. If you believe this could be a problem, contact your lender as soon as possible to explain the situation and explore the options open to you, such as temporarily reduced payments. Some lenders are more receptive to this than others, particularly where borrowers have contacted them before any payments are missed.

Q Should I stop my other regular repayments?

Debts repayments, such as those credit cards, should be maintained where possible. Consolidating debts on credit cards is not as easy as it was two years ago, but moving debts on a high interest card to one with a more competitive rate is worth considering.

If you need to reduce credit card repayments, look into making a temporary arrangement until things improve, Smith suggested. "Remember to increase it again when you get back to full hours, as credit cards are very expensive debts," he added. "In any case, let your lender know about the situation early on, before things get serious."

Q Should I stop paying my insurance premiums?

It depends on the type of insurance. When premiums on products such as life insurance are reduced or stopped altogether it is difficult to start them again at normal rates at a later date, particularly if it is some time since the cover was taken out, or if medical issues develop in the interim.

Other insurance products can be reviewed, however. For example, does the car that you drive warrant fully comprehensive insurance, or can it be insured on a third party, fire and theft basis, which should be much cheaper? Similarly, if you're paying for identity fraud insurance, you may find this is already covered by your bank.

Q Should I cut my savings and pension investments?

Cutting contributions to savings and investments is a big temptation. Reducing regular savings is better than not saving at all, but it is important to understand the implications.

Advisers particularly warn against stopping pension contributions, partly because it means potentially missing out on the eventual rebound in markets.

"If a pension cutback is opted for, be sure to compensate with higher payments when you get back to full-time work", said Smith. "This is very important in order to keep on course for the retirement income you are targeting as funding gaps can make very big holes in your plans, particularly in the early years of funding."

Q How will the reduced hours affect my company benefits?

Benefits such as pension funding, life cover and private medical insurance will usually continue unaffected, but it's worth checking if they are impacted.

Company pension funding may well be affected unless you arrange with your employer to maintain contributions at the same level, according to Fraser Smart, regional director at employee benefits consultancy Buck Consultants. "Some employers are agreeing to maintain pensionable salaries at previous levels so any short time working doesn't impact on retirement benefits," he explained.

"This benefits both retirees over the next few years and also people who may be forced to leave their jobs over the next year or two if the downturn continues."