Context
Millions of UK families don’t save enough. This manifests in three ways: a lack of accessible ‘rainy day’ savings to cushion small cashflow shocks; inadequate precautionary saving to see people through large and unexpected income shocks; and insufficient saving to provide an adequate income in retirement. These three savings challenges are intrinsically linked. However, existing policies have treated them as separate objectives creating a tension where families must choose between saving for precautionary purposes or saving for retirement.
This report draws on behavioural insights and lessons from how other countries navigate the same issues to outline how the UK’s savings policy architecture can be transformed to provide a joined-up solution to Britain’s triple savings challenge. The report is by The Resolution Foundation, is an independent think-tank focused on improving the living standards of those on low-to-middle incomes
Key findings
Findings include the following:
- As many as 1-in-3 (30 per cent) of working-age adults live in families with savings below £1,000, leaving them financially vulnerable and ill-equipped to respond to small cashflow shocks.
- There is also a shortfall in larger precautionary savings balances that would help people cope with bigger shocks. If every working-age family in Britain had at least three months’ income in precautionary savings, aggregate savings would be £74 billion higher.
- Saving for retirement is also too low. Overall 39 per cent of working age people were under-saving for retirement, with less than two thirds of pre-retirement income.
- Policies to boost precautionary saving have largely involve fiscal incentives, such as tax breaks or bonuses based on account balances, which disproportionately benefit wealthier households.
- Pension auto-enrolment has transformed pension saving; the proportion of employees with a pension climbed from 47 per cent in 2012 to 79 per cent in 2021.
- Precautionary and pension saving are in tension. Evidence indicates that when default auto-enrolment contribution rates were increased, employees only reduced their consumption by 34p for every pound and funded the rest through either lower liquid saving or higher debt.
- Other countries alleviate the tension between precautionary and pension saving by allowing early access to pension savings under a variety of conditions so that they can also act as a precautionary savings vehicle. The UK’s savings policy could evolve to help boost retirement saving while also making British families more financially resilient in the short term.
Recommendations
- The government should extend auto-enrolment to begin from the age of 18 and eliminate the lower earnings limit. Then the government should set a medium-term goal to raise the default pension contribution rate to 12 per cent.
- These higher default contributions can boost liquidity without hurting pension savings. The authors suggest that the extra 2% of pension contributions should go into a highly-liquid ‘sidecar’ savings account that can be used freely. Any amount over £1,000 would move into the employee’s pension and get tax relief.
- To help families handle large, rare expenses, the authors propose that people should be allowed to borrow the lesser of £15,000 or 20% of their pension pot value. They would have to repay this based on their earnings, with interest to make up for lost growth.
Points to consider
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Methodological strengths/weaknesses: This was not a systematic review of the literature, and no methodological details are given as to how the sources were chosen and what was included
- There is no information given about the analysis conducted by the authors
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Applicability: Aimed at government and policy makers but also of interest to support agencies and anyone working with financially vulnerable households.
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Relevance: Relevant given current pressures due to increased cost of living and ongoing savings shortfalls
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Generalisability: Focused on analysis of UK households and UK policy. The report looks at how the UK can learn from other countries.
