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Rainy day savings via pensions automatic enrolment prevents debt problems and saves money

July 11, 2017

Helping people to build a £1,000 rainy day savings fund via the pensions automatic enrolment framework would prevent debt problems, would have a minimal impact on retirement incomes and would be better financially for people than if they stopped paying into their pensions to cover emergency costs, this is according to new analysis conducted by the Pensions Policy Institute (PPI) for StepChange Debt Charity.

StepChange Debt Charity has called for the introduction of rainy day savings pots or Accessible Pensions Saving (APS) via the existing automatic enrolment framework as a way to overcome the economic and behavioural barriers to building up precautionary savings, especially for those on low and middle incomes. Previous analysis by the charity found that if households had £1,000 in accessible savings it would reduce their risk of debt by 44% and could prevent 500,000 families from falling into problem debt2.

With the UK savings rate having fallen to a record low 1.7%3 and with 14.5 million British adults4 not having anything set aside for a rainy day, there is an urgent need for innovative solutions that will help households to build financial resilience and insulate them from the harmful effects of problem debt. StepChange Debt Charity is calling on the Department for Work and Pensions (DWP) to consider its proposals in the current review of automatic enrolment.

How would APS work?

The scheme would see a temporary diversion of automatic enrolment contributions into the APS. This savings pot could then be accessed to cover emergency costs, such as replacing a boiler. The policy would allow for a maximum APS, initially set at £1,000 and then uprated into in-line with an index. For further details see notes to editors.

The impact of APS

The PPI examined how a range of people might use APS, a variety of scenarios in which it would be used, and how long it would take to build £1,000 in APS. Using these case studies, the PPI’s modelling shows that there would be minimal impact on retirement incomes; it found that an extended period of not paying into a pension in order to cover emergency costs would have a greater impact on retirement income; and that for those on low-median incomes building the full £1,000 would take between two and seven years.

Minimal impact on retirement incomes

Laura (25-year-old; low-income; single household) - in the case of a women earning in the bottom 10th percentile, even if she were to take the whole £1,000 APS out four times between the ages of 35-50, the weekly reduction in her retirement  income would be just  2% (£4). If she was to only take the full APS once, the reduction in weekly retirement income would be just 0.8% (£1.50).

Derek (25-year-old; low-income; married) - a man earning at the 30th percentile of the earning distribution, who accesses the full APS four times between the age of 35-50 would only see a reduction of in weekly retirement income of 0.4% (£1), after accounting for pension credit.

APS better than a period without pension contributions

The PPI’s research showed that if people were to stop paying into their pension for a period to cover emergency costs, instead of using the APS, the effects on retirement income would be more pronounced.

Sally (25-year-old; median income; single household) - in the case of a median earning woman, if she were to stop paying into her pension for a period of nine years, the reduction in weekly retirement income would be 5.2% (£12.4), more than if she were to withdraw the full APS four times.

Mike O’Connor, Chief Executive of StepChange Debt Charity, said:

“Pensions automatic enrolment has proved that the right proposition with the right incentives can help overcome barriers to saving. The current automatic enrolment review offers a real opportunity to look at how we can further improve the financial resilience of households.

“We need better ways to help families to build up rainy day savings. By ensuring that families have access to savings that can help them to manage periods of financial instability and prevent them from falling into problem debt, we can reduce the most harmful effects debt has on both individuals and families.”

John Adams, senior policy analyst at the Pensions Policy Institute, said:

“StepChange Debt Charity’s system shows how pensions policy can be harnessed as a way of helping people manage other financial issues such as reducing problem debt for households before it arises. The system combines automatic enrolment with accumulation of affordable and accessible savings, and tries to balance the impact on pension outcomes with the need for small amounts of available funds.”

Notes to editors

1. All figures unless otherwise stated are taken from ‘Using accessible pensions savings to provide a financial safety net’ (Pensions Policy Institute – July 2017); StepChange Debt Charity’s response paper ‘Strengthening the saving safety net’, is released alongside the PPI research. Full embargoed copies of both documents available on request.

2. An Action Plan on Problem Debt (StepChange Debt Charity – 2015)

3. Households & NPISH saving ratio (ONS - 2017)

4. Almost a third of Brits saved nothing in the last 12 months (StepChange Debt Charity – 2017)

5. How would APS work:

There is an upper threshold to APS contributions set each year. The upper threshold determines the contributions made into the APS and when they stop. It is assumed to be uprated each year in line with an index.

While the APS pot is less than 30% of the upper threshold, only employee contributions feed into it, at a proportion of 50% of net contributions. Employer contributions and tax relief are unaffected and enter the regular pension pot.

When the APS is over 30% of the upper threshold, 50% of total contributions flow into it (that is 50% of contributions from the employee, employer and tax relief).

When the APS is at the upper threshold no contributions are diverted and 100% of contributions remain with the main pension section.

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