Credit, Collections & Insolvency News
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 debt.
With the UK savings rate having fallen to a record low 1.7%] and with 14.5 million British adults[4] 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.
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.
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.
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.
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 oPlicy 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.”
