On 6 August 2015, the charity StepChange published a discussion paper: Becoming a nation of savers: Keeping families out of debt by helping them prepare for a rainy day. This looks at which families are least likely to have any savings (people on low-to-moderate incomes, people in rented accommodation and people with younger children), the financial and social benefits of having savings and proposes a list of policy changes that could help encourage savings by people that don’t have them at the moment.
Having a good rainy day savings pot means that an unexpected bill or drop in income is less likely to become a crisis. At the moment 30% of families in Britain have less than £1,000 in savings. As the report says:
“The policy challenge is to get families saving by helping them overcome economic and behavioural barriers. The goal should be to improve financial resilience and reduce the level of problem debt by ensuring all families have a minimum of at least £1,000 saved to help them cope during a ‘rainy day’.”
I’ve written before about the importance of people with debts having an emergency fund, looking at the two cases of trying to repay debt as quickly as possible or being in any form of debt management or insolvency, but those article are aimed at individuals trying to do their best within the current situation. Here I am looking at the proposals StepChange makes for policy changes that could transform the savings environment.
Isn’t it just lack of income that stops savings?
If people can’t save because they don’t have enough income, changing policies to promote savings wouldn’t have much impact. But although low income is a major driver of low savings habits, there are other behavioural factors at work. People report that they don’t save because they:
- are trying to pay off their debts (ie exceeding minimum debt repayments);
- have debt repayments that are too high (ie the minimum debt repayments);
- don’t regard saving as necessary;
- haven’t focused on the need to save.
These suggest that policies that were specifically debt-focused, or targeted at overcoming inertia/procrastination could succeed in increasing saving.
Doesn’t the government already incentivise savings?
Yes it does, through ISAs, pensions etc. But most of these incentives are via tax relief – they favour people with high earnings with a lot to put away i.e the families that probably would probably have saved anyway without any government encouragement. With interest rates at their current low levels, the “tax relief” on a cash ISA account with StepChange’s target of £1,000 in it would be worth less than £5 per year for someone paying basic rate tax. And many of the most financially vulnerable don’t pay any income tax at all. So tax incentives aren’t an effective way to encourage rainy day savings.
StepChange’s seven policy recommendations
- The government should set a target for all families in the UK to have at least £1,000 in accessible cash savings. Setting a target will help encourage a culture where having a raining day savings pot is seen as normal and desirable. It will also enable different parties (DWP, banks etc) to determine whether changes they make are likely to promote or make it harder for people to reach this target.
- The government should work with employers, pension providers and banks to allow struggling savers to build a rainy day saving buffer via the pensions auto-enrolment system. Auto-enrolment into pensions appears to be rolling out well and significantly increasing take up. StepChange are suggesting that a default amount of contributions would go into accessible savings rather than inaccessible pension, to a maximum of £1,000, being incentivised for example by matching contributions from employer / government. StepChange suggest piloting, to test the effectiveness of different combinations of incentives.
- Government should build a saving element into the welfare system via income thresholds and work allowances in Universal Credit and tax credits This could be an effective way of reaching the mostly vulnerable groups who would be less likely to benefit from pensions-style auto-enrolment in workplace saving.
- Government should expand current trials of credit union accounts for pupils linked to financial education to secondary schools. Existing pilots include the Archbishop of Canterbury’s Life Savers project in primary schools and the scheme in Hackney where secondary school pupils are offered a Credit Union savings account with £20 in it.
- Banks should explore, develop and ultimately pilot savings accounts which allow families to access preferential savings rates and offers even if they can only open accounts with a small deposit and only pay in small amounts on an intermittent basis subsequently. At the moment “best buy” bank and savings accounts almost all require high minimum balances, regular contributions or have conditions on access. This isn’t going to be an easy one to crack …
- Financial services providers should explore the use of prize-linked savings accounts which appeal to lower-income consumers. See for example the “Save to Win” program in some parts of America, which has had success in encouraging financially vulnerable people to accumulate savings. One way that can be effective is to offer an opportunity to win a prize on the occasion of each deposit.
- Enhance the current Standard Financial Statement proposal to include a savings element in the budgets of people receiving debt advice to resolve financial difficulties. This could be voluntary, through the Lending Code, which would be encouraged if the FCA explicitly acknowledges the benefits of saving. Although this reduces the money that can go to creditors, it makes it much more likely that the debtor can keep up with the debt repayments in the medium term so it could be cost effective for the lenders.
For more details on any of these, read the report!