Families Need Help In Rising To The Triple Savings Challenge Of Saving More For Rainy Days, Bigger Life Events And Retirement

12th February 2024

Families across Britain face a ‘triple savings challenge' of insufficient ‘rainy day' savings of at least £1,000, an inability to cope financially with bigger life events like family breakdown, and inadequate retirement incomes. But all three can be addressed by building on the success of auto-enrolment into pension saving to encourage more liquid saving too, according to new Resolution Foundation research published today (Monday).

The report Precautionary Tales - part of a partnership with the abrdn Financial Fairness Trust - examines the state of saving across Britain, and what can be done to improve it.

The report finds that one-in-three working age families - rising to almost half of low-income families - don't have basic level ‘rainy day' savings of at least £1,000. This was exposed during the cost of living crisis, as families with low savings were more than twice as likely to have used credit cards, overdrafts, or borrowed money from formal lenders in order to meet daily expenses compared to those with more than £1,000 of savings.

However, while modest savings of £1,000 can help with unexpected costs such as broken fridges and car repairs, larger savings are needed to cope with bigger life events such as unemployment or family breakdown. The report notes that far too few families have these larger savings either - less than half of working age families have savings worth at least three months of income.

As a result, Britain has a £74 billion savings shortfall versus a country in which every working age family has at least three month's income in precautionary savings.

More encouragingly, pension coverage has been transformed over the past decade, with auto-enrolment increasing the share of people saving into a pension from 47 per cent in 2012, to 79 per cent in 2021.

However, too many are still not saving enough for an adequate income in retirement. Around two-in-five working age people (13 million in total) are currently not saving enough to meet the minimum target for an adequate retirement income (at least two-thirds of their pre-retirement income).

The Foundation says that confronting this triple savings challenge is particularly daunting as there are trade-offs over which kind of saving to prioritise. Recent research shows that additional pension contributions are not only funded out of lower consumption, but also lower savings and, in some cases, higher debt.

However, all three savings challenges can be met by learning from policy successes at home - the opt-out approach of auto-enrolment - and abroad.

The report calls for auto-enrolment contributions to be gradually increased from 8 to 12 per cent, with employer and employee contributions matched at 6 per cent each.

These 12 per cent contributions should include a 2 per cent contribution into an easy access ‘sidecar savings' scheme of up to £1,000, with contributions above this level going into a pension pot. This would revolutionise the number of families with ‘rainy day' savings in the same way that auto-enrolment has transformed pension saving, while also boosting people’s retirement incomes.

Making the UK’s highly inflexible pension pots more accessible during people’s working lives will also help them to cope with bigger life events or difficult circumstances. Currently, it is not possible to draw down any of your pension before the age of 55 (rising to 57 by 2028) without incurring a significant penalty, except in cases of terminal illness.

The report proposes allowing savers to borrow the lesser of £15,000 or 20 per cent of the value of their pension pots. These loans would be paid back via higher contributions directly into their pension pot at a later stage. Enabling early, restricted, and repayable, access to pensions can help families deal with pre-retirement financial challenges, say the authors.

This more flexible approach already works well in the US, where around one-in-five participants in 401(k) plans have a loan against their pension at any one time, and around 90 per cent of these loans are repaid to their own funds in full and with interest.

Molly Broome, Economist at the Resolution Foundation, said, "Families across Britain face a triple savings challenge – not saving enough for rainy days, bigger life events, or for a decent income in retirement.

"One-in-three families in the country have less than £1,000 in savings – which left many people exposed during the cost of living crisis – while around 13 million individuals aren’t saving enough for an adequate income in retirement.

"We can address all three challenges by building on the success of pensions auto-enrolment to opt more people into both easy access and long-term saving.

"We should also offer people more flexibility over their pension pots, as other countries do, in order to help them with difficult circumstances. These reforms will improve families’ financial resilience during their working lives and into retirement too."

Mubin Haq, CEO of the abrdn Financial Fairness Trust, said, "Britain is not a nation of savers. Too many have little to fall back on, lacking the rainy-day buffers that prevent a drama turning into a crisis. Savings are essential to weathering economic shocks but current financial initiatives have done little to boost savings for those who need them most. Greater contributions are also needed to prevent hardship in retirement.

"Pensions auto-enrolment offers a great opportunity to provide a safety-net millions don’t currently have. This would cover the funds needed for those rainy days, for when life shocks happen and help provide a decent income at the end of our working lives."

Key findings
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.

Larger precautionary savings balances would help people cope with bigger shocks, but the country’s savings shortfall is significant. 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. 39 per cent of individuals aged 22 to the State Pension age (equivalent to 13 million people) were undersaving for retirement when measured against target replacement rates of at least two third of pre-retirement income.

Policies to boost precautionary saving have largely involve fiscal incentives, such as tax breaks or bonuses based on account balances. These policies are expensive, exceeding £8 billion in 2023-24, and are inefficient as they disproportionately benefit wealthier households.

Pension auto-enrolment has transformed pension saving. Since the introduction of auto-enrolment, the proportion of employees with a pension climbed from 47 per cent in 2012 to 79 per cent in 2021 – an extraordinary policy achievement.

Precautionary and pension saving are in tension. Evidence indicates that when default auto-enrolment contribution rates were increased from 2 per cent to 8 per cent between 2018 and 2019, for every £1 reduction in take-home pay due to higher pension contributions, employees reduced their consumption by 34p, with the rest of the contribution funded 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. This offers insights into how the UK’s savings policy could evolve to help boost retirement saving while also making British families more financially resilient in the short term.

Read the full report HERE
Pdf 57 Pages

M Broome, I Mulheirn & S Pittaway, Precautionary tales: Tackling the problem of low saving among UK
households , Resolution Foundation, February 2024