Act now to offset the worst should you suddenly lose your income

IT'S a prospect that no-one wants to think about, but as Scottish unemployment levels continue to edge up more people are facing up to a crucial question - how would they cope financially if they lost their main source of income?

For many households, the consequences are potentially disastrous. A massive 93 per cent of UK families say they have no financial protection in place should they suffer unemployment, illness or a death, according to recent Aviva research.

And the financial pressures on Scottish households are indicated by Shelter Scotland figures showing that more than 200,000 people have been forced to use their credit cards in the past year to pay their rent or mortgage.

But with the government trimming benefits - including support for mortgage interest payments for those who have been made redundant - the onus is, more than ever, falling on individuals and families to ensure that loss of income does not spell financial disaster.

So, for many Scots, thoughts have understandably turned to what they have to fall back on financially in the event of the worst happening. There are a few things you can do to bolster your finances - here are a few:

1 Save for a rainy day

This is easier said than done, in a climate of rising prices and low or non-existent savings account returns. But the first line of defence is having enough savings squirrelled away to cover bills and expenses for a few months. Almost a third of Britons have no rainy day savings, according to Scottish Provident, which said many people were happy to live off their credit card, a strategy that could lead to rising debts.

The returns on the easy-access savings accounts needed for rainy day savings are currently failing to keep pace with inflation. But most savers could still boost their emergency fund by shopping around for the best deal, through comparison sites such as moneyfacts.co.uk and moneysupermarket.com, and by using their full individual savings account (Isa) allowance.

2 Organise/clear your debts

However, if you have debts to clear, savings may not be your priority. Do a debt audit to work out what you owe -whether it is on a mortgage, rent, credit cards, loans or an overdraft - then identify the most expensive and concentrate on paying that down first. You can improve your chances of clearing your debts by establishing what money you have coming in and going out and using that to set a budget.For some people, merely finding a way of living within their means is sufficient to kick-start the climb out of debt.

Where debts are more serious, however, consider getting help from Citizens Advice or the Consumer Credit Counselling Service (see point 5).

3 Understand your entitlements

Many people are reluctant to claim benefits to which they are entitled when they are out of work, perhaps because they are unaware of them, they see it as a stigma or they assume that they will be working again soon.

Benefits that might be available if you have paid national insurance contributions (NICs) include jobseeker's allowance, income support and housing benefit. Each of these has different criteria, however.

For example, you can claim income jobseeker's allowance if you have savings of less than 16,000, although the amount reduces gradually from 6,000 and upwards. If you have made NICss, then you can claim for contributions-based jobseeker's allowance. Whichever you get depends on your level of contributions, although it could be a blend of the two.

Contributions-based jobseeker's allowance payments are 65.45 a week for those 25 or over and 51.84 for those between 16 and 24. For more information, call 0800 055 6688 or visit www.jobcentreplus.gov.uk.

Other benefits for which you might be eligible if you are made redundant include income support (which is means tested and paid if you are judged as not having enough to live on), child benefit, child tax credits and housing benefits.

To find out what you could claim, visit www.turn2us.org.uk/benefits_search.aspx.

4 Get covered

Many people are, understandably, reluctant to pay insurance premiums when confidence in their finances is low. And the endless list of things you can insure against makes it difficult to work out what kind of insurance you should prioritise, as Derek Smith explains in the Expert View.

The main insurance policies that can help cover a shortfall in the event of illness or redundancy are PPI, income protection and critical illness (the latter specifically covering serious illnesses rather than unemployment).

PPI has been the subject of one of the biggest mis-selling scandals of recent years. However, that has occurred where the product has been sold by banks alongside the loan or mortgage the insurance is designed to cover. It is a more valid option when sold as a standalone product by companies such as Paymentcare and British Insurance.

Sometimes known as accident, sickness and unemployment cover, PPI pays out a monthly amount for either one or two years in the event of losing your income. But it's worth shopping around, with premiums as low as 5 a month but usually around 20 to 30.

Income protection is a more reliable and comprehensive alternative, paying out more and for longer. It usually pays out between 50 and 65 per cent of income in the event of you being unable to work and can do so until retirement.Unemployment cover can be requested as a "bolt-on". It's more expensive than PPI but pays out more, lasts longer and covers more eventualities.

More costly again is critical illness insurance, which pays out a tax-free lump sum on the diagnosis of a serious illness or in the event of disability. It isn't much use in the event of redundancy, while it is difficult for people with pre-existing medical conditions to secure affordable cover, if any. But in times of financial hardship, a lump sum that can help clear debts and cover regular payments is invaluable.

Protection policies such as critical illness and income protection are best bought with advice from a broker or an independent financial adviser, although they can be bought direct from insurers and comparison sites.

5 What not to do

Panic. It sounds obvious, but many people take knee jerk decisions in the wake of bad news that prove counterproductive in the long-term.

Take on board the advice above by finding out what benefits you are entitled to. If you are concerned about keeping up with your debt and mortgage repayments and have no insurance or savings to fall back on, then seek advice. Go to a Citizens Advice bureau near you or contact the Consumer Credit Counselling Service (cccs.co.uk or 0800 138 1111), Money Advice Scotland (moneyadvice scotland.org.uk or 0141 572 0237) or National Debtline (nationaldebtline.co.uk or 0808 808 4000).

Whatever you do, don't be tempted into taking a short-term loan. Loan sharks prey on households struggling to make their regular payments, but what might seem like a reasonable deal can become an albatross around your neck if you don't pay it off quickly.