Last year, StepChange helped almost 600,000 people struggling with their debts. Here Joseph Surtees, Senior Public Policy Advocate, explains why savings are so important for financial resilience.
Almost three million people across Britain are in problem debt. Why are so many people falling into difficulties?
One key problem is that many families lack financial resilience. And for most, the key to resilience is savings. Thirteen million people do not have a month’s worth of savings to keep up with essential bills. Therefore, if they experience a shock to their finances, such as losing their job or falling ill, it can result in a catastrophic spiral into debt.
If the unexpected happens, families are too often left with an invidious choice: take out credit, or fall behind on an essential household bill, such as rent or energy.
Decisive policy interventions are needed to address this problem. But the cornerstone of current savings policy, the ISA, is not serving lower income households well. Households earning up to £26,000 - the national average household income - are just half as likely as those earning £50 - £80,000 to have an ISA. Why? At least partly because the tax incentive has little appeal if you pay little or no tax in the first place
In is therefore crucial that whichever party wins the upcoming election moves to boost savings levels among lower to middle income households. Analysis by Select Statistical Consultants commissioned by StepChange Debt Charity shows that 500,000 households would have avoided problem debt if they had £1,000 saved. Low to middle income households in particular would see their chances of falling into debt reduced if they had ‘rainy day’ savings.
We recently published an Action Plan on Problem Debt for the next government. One of the document’s key proposal proposals is aimed at helping families build up ‘rainy day’ savings to help them stay away from taking out credit when hit by an unexpected shock.
We believe that the Government should set a target of every household having £1,000 saved. Key to reaching this target among low to middle income families is harnessing behavioural insights to improve the incentives for people on low incomes to save, and make saving a default choice. The Government should build a “rainy day” savings pot into the pensions auto-enrolment framework, with the first £1,000 saved being short term saving with subsequent sums going into a pension. Savers would be incentivised via tax and employers’ contributions.
Crucially, the incentive for saving would be improved by the reward being presented as matching. It would use the same tax relief as pensions, but in line with pensions, the tax relief would be framed as Government and employers matching the contribution – which has proven successful in boosting pension savings rates and reducing ‘opt out’.
These proposals are simple and low cost and do not need to involve huge new amounts of regulation. In fact, action on problem debt should reduce costs elsewhere. Credit is a deeply unsustainable “safety net” – interest and charges quickly mount up if you aren’t in a position to repay the bills quickly - landing people in a “debt trap”.
We will continue to push for government to adopt our proposal and would be very keen to work with any interested parties to help us move this vital agenda forward. In the next phase of our work we want to look at how to help the self-employed, who aren’t covered by auto-enrolment, and those on very low, or highly irregular incomes.
Given the £8.3 billion costs of people falling into problem debt, there is a huge incentive to help people build up savings. With £12 in social costs and costs to creditors saved for every £1 spent on preventing problem debt, there is little doubt about the value for money of such a move.