Half a million households could be prevented from falling into problem debt by if they had just £1,000 in precautionary savings, according to new findings from StepChange Debt Charity.
Research conducted for the charity by Select Statistical Consultants shows that households with modest precautionary savings are less likely to fall into problem debt and that the protective effect is most apparent for people on lower incomes.
The charity believes that successive governments’ savings policies have failed to address the particular needs of lower income households, both in terms of the incentives to save and the way that schemes are delivered; and is calling on the next government to incorporate “rainy day” savings into the existing pensions auto-enrolment framework, to help insulate households from problem debt.
The findings are released today as part of the charity’s call on potential governments ahead of the General Election to adopt An Action Plan on Problem Debt at a time when personal debt shows worrying signs of increasing.
The problem of a lack of savings
Thirteen million people in the UK lack the savings to keep up with essential bills for just one month if their income dropped by a quarter . It is among low and middle income households where this problem is most acute – 42 percent of people earning less than £15,000 per year do not have a month’s savings; this figure stands at 34 percent for people earning £15,000-£25,000; and 27 percent for all households.
Savings policies are failing lower income households
The cornerstone of government savings policy has long been the ISA, and the tax relief on such savings comes at a substantial cost - £2.85bn in 2013/14  and planned to increase to £3.42bn in 2018/19 . But the benefits of ISAs go disproportionately to higher income households. Households earning below £26,000 are just half as likely to have an ISA as households earning £50,000-£80,000 .
Savings incentives for lower income households announced in the 2014 Budget, under which low income households will be able to reclaim tax on a proportion of their savings income, are estimated to cost just £355m, a mere tenth of the projected total ISA budget.
Fixing the problem
StepChange Debt Charity is calling for the government to set a target of every household having £1,000 saved for a rainy day.
This could be achieved by the government building “rainy day” savings pots into the successful auto-enrolment framework used for pensions.
- Saving under the scheme would be incentivised with government and employers agreeing to match a proportion of the amounts saved – this “matching” could be achieved through tax relief and employers’ contributions, as now done for pensions. Such matching would make it more appealing to lower income households.
- The savings pots would be transportable meaning that the pot would be retained if people moved employers or fell out of work.
Mike O’Connor, Chief Executive of StepChange Debt Charity, said:
“With personal debt showing worrying signs of growing and millions of people living on a financial knife edge and at risk of serious debt problems, we are calling on potential governments to make tackling personal debt a national priority. Encouraging more saving, especially by people on low incomes, is vital if they are to have a financial buffer to cope with financial shocks and avoid the slide into problem debt.
“Governments have started to address the retirement savings crisis by making saving easy, automatic and appealing. Now that system is established the next Government should deal with the rainy day savings crisis in the same way.”
“In addition to encouraging more saving, in our action plan we are also asking potential governments to provide more support for people who want to tackle their debt problems, protect children and families from aggressive debt collection practices and ensure that people are helped to get back on their feet quickly following a financial crisis.”
An Action Plan on Problem Debt
StepChange Debt Charity’s proposals for tackling problem debt in the UK include:
- Ensuring that low income households can access low cost credit products
- Scaling up free debt advice to reach the 1.4m people who urgently need debt advice but aren’t getting it
- A new scheme to give greater protections to everyone seeking to deal with their debt problem from additional interest and charges and enforcement action
- Protect children and families from the harm of aggressive debt collection practices
- Ensuring that debt solutions are fit for purpose, and do not have a disproportionate impact on people’s life chances