WWW.IPPR.ORG
SavingandAssetBuildinginLowIncomeHouseholds
TonyDolphin
December2009
©ippr2009
InstituteforPublicPolicyResearch
Challengingideas– Changingpolicy
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ippr|SavingandAsset-BuildinginLow-IncomeHouseholds
Aboutippr
TheInstituteforPublicPolicyResearch(ippr)istheUK’sleadingprogressivethinktank,
producingcutting-edgeresearchandinnovativepolicyideasforajust,democraticand
sustainableworld.
Since1988,wehavebeenattheforefrontofprogressivedebateandpolicymakinginthe
UK.Throughourindependentresearchandanalysiswedefinenewagendasforchangeand
providepracticalsolutionstochallengesacrossthefullrangeofpublicpolicyissues.
WithofficesinbothLondonandNewcastle,weensureouroutlookisasbroad-basedas
possible,whileourGlobalChangeprogrammeextendsourpartnershipsandinfluence
beyondtheUK,givingusatrulyworld-classreputationforhighqualityresearch.
ippr,30-32SouthamptonStreet,LondonWC2E7RA.Tel:+44(0)2074706100E:[email protected]
www.ippr.org.RegisteredCharityNo.800065
ThispaperwasfirstpublishedinDecember2009.©ippr2009
Abouttheauthor
TonyDolphinisSeniorEconomistatippr.
Acknowledgements
ipprwouldliketothanktheConsumerSpendingandDebtproject’sfunders,Friends
ProvidentFoundation,andtheadvisorygroup:JimFearnley,MoneyAdviceTrust;Andrea
Finney,PersonalFinanceResearchCentre;MillaGregor,ToynbeeHall;SuzanneHall,Ipsos
MORI;MartynSaville,Which?;DanielleWalkerPalmour,FriendsProvidentFoundation;and
JudithWardle,WardleMcLean.ThanksarealsoduetoDaliaBen-GalimandKateStanleyat
ipprfortheircommentsonthisbriefing.
Finally,abigthankyoutoallthefamilieswhotookpartintheresearchfortheirtimeand
input.
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Contents
Executivesummary ............................................................................................................. 4
Introduction......................................................................................................................... 5
Researchmethodology........................................................................................................ 6
Benefitsofsavingandassetownership.............................................................................. 7
TrendsinsavingintheUK .................................................................................................. 8
Savingbylow-incomefamilies............................................................................................ 9
PoliciestoencouragesavingintheUK ............................................................................ 10
Explainingsavingbehaviour ............................................................................................. 11
Researchfindings .............................................................................................................. 14
Conclusions ....................................................................................................................... 18
Recommendations............................................................................................................. 19
References......................................................................................................................... 21
Appendix1:Savingsproductsusedbyfamiliesinoursample......................................... 22
Appendix2:Internationalexamplesofsavingsproductsdesignedtoincentivisesaving.. 25
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ippr|SavingandAsset-BuildinginLow-IncomeHouseholds
Executivesummary
Havingastoreof‘rainydaymoney’canincreasealow-incomefamily’sresilienceandenable
ittocopebetterwithanunexpectedshock,suchasthebreakdownofawashingmachineor
eventhelossofajob.Storingupassetscanincreaseopportunities,by,forexample,
providingthefundstosupportchildrenwhentheygotouniversityortopayfortraining.But
mostlow-incomefamiliesfinditverydifficulttosave,otherthanforspecificeventsalready
onthehorizon.
ippr’snewstudyoftheincome,spending,savingandborrowingof58low-incomefamilies
revealsthatmosthaveapositiveattitudetotheideaofsaving,butfinditverydifficultto
translatethatattitudeintoactualsavingforanylengthoftime.Mostfamiliescopewellwith
thetaskofsavingforChristmas,birthdaysandtheschoolholidays,oftenbyusinginformal
methods,whichrangefromkeepingmoneyinajartoChristmasclubsorganisedbyfamilyor
friends.Butmostdonotmanagetobuildupanyprecautionarysavings.Asaresult,when
thewashingmachineorboilerbreaksdown,theyareforcedtotakeondebttopayfor
repairsorareplacement.Andveryfewlow-incomefamiliesaredoinganysavingforthe
mediumterm,eventhoughmanywouldliketodosofortheirchildren.
Therecessionhashadaneffectontheabilityofsomelow-incomefamiliestosave–wherea
wage-earnerhaslosttheirjoborhadtheirworkinghoursreduced.Butperhapsmore
significantinthelasttwoyearswerethedouble-digitpercentageincreasesinfoodand
energypricesin2008.Familiesreportedthatspendingmoreontheseitemsmeantitwas
evenlesslikelytherewouldbemoneyleftovertosave.
Thishighlightshowlow-incomefamilies,quitereasonably,regardprecautionarysavingand
long-termasset-buildingasoptional,residualactivitiesandhelpstoexplainwhytheirsaving
activityissolow.Surveydatasuggestthat44percentoffamilieswithaweeklyincomeof
lessthan£200havenosavings(DepartmentforWorkandPensions2009).
However,behaviouraleconomistsbelievethatsavingcanbeincreasedthrougha
combinationofincentives.Themosteffectivesavingsproductsforlow-incomefamilies
combinemakingsavingaseasyaspossible(orevenautomatic),whileprovidinganincentive
forsavingstoberetained,forexamplethroughasavingsmatch.Suchproductscannowbe
foundaroundtheworld.Theyarenotforallfamilies– somewillstillnothavethecapacityto
save.Buttheycanhelpthosethatmightbeabletoputalittleasidefromtimetotime.In
theUK,theChildTrustFundandthesoon-to-be-introducedpersonalaccountsfor
retirementsavingsmakesavingeasythroughauto-enrolment,whileSavingGateway
accountswillmatchsavingsafteratwo-yearperiod.
ipprisnowproposingasavingsaccount,backedbytheGovernment,thatwillencourage
low-incomefamiliestosavethroughouttheirlives.Ourresearchshowsitneedstobesimple,
easytomonitorandaccessandmightpay‘bonuses’ratherthaninterest.TheGovernment
shouldprovideincentivesforretainingsavings,buttheaccountmustallowsomeflexibility
forwithdrawals.Ifsuchaproductweremadeavailable,andtherightfinancialinformation
providedalongsideit,ourresearchsuggeststhatlow-incomefamilieswouldtakethe
opportunitytobuildsomeprecautionarysavings,andperhapsevenaccumulateamodest
storeofassets.Thiswouldhelplow-incomefamiliesbymakingthemmoreresilienttoshocks
andbetterabletotakeadvantageofopportunities.
Thecostsofextraincentivestoencouragelow-incomefamiliestosavecouldeasilybe
coveredbylimitingtaxreliefonpensioncontributionstothebasicrateforeveryone.This
wouldbeaprogressivemove,replacingtaxreliefthatnowbenefitsthoseonhighincomesto
improvethefinancialwellbeingofthoseonlowincomes.
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Introduction
Therearenumerousstudiesthatshowhavingastoreofreadily-accessibleassetsincreases
thewellbeingofhouseholds(see,forexample,Paxton2003).Forthemostpart,these
studiesemphasisethefinancialbenefitsofassets.Forexample,itissuggestedthat:
•Assetsbuiltupduringchildhoodmightbeusedtofinancefurthereducationor
trainingafterleavingschool.
•Forthoseofworkingage,assetscanbeusedtocoveranemergency,suchastheloss
ofone’sjoboraperiodofseriousillness;topayforretrainingoradulteducation;or
asadepositonahouse.
•Forolderpeople,havingastoreofassetscanboostlivingstandardsinretirement.
However,thereisalsoevidencethat,formanypeople,astoreofassetsprovidesa
psychologicalbenefit,too.Knowingthattheyhavesomefundstofallbackon,ifnecessary,
improvespeople’scurrentwellbeing,evenifthelikelihoodofhavingtoaccessthefundsis
low.Assetsincreaseaperson’sresiliencetoshocksandtherebyimprovetheirqualityoflife
(see,forexample,Lister2006).
Itisalsowelldocumentedthatlow-incomehouseholdsstruggletosaveandthatmosthave
few,orno,assets.Asoneofthefamiliesinourstudyputit:
IsupposebecauseIamreallynotinapositiontosaveorthinkofanylongtermplans,becauseIbasicallylivefromdaytodayonthemoneythatIget,
soIjustgetonwithit…Idon’teventhinkaboutit[saving].Itisawful,I
supposeyoushouldreally.
(Female,45,Nottingham,single-parenthousehold,onechild)
Whenasked,themajorityoflowearnerssaytheydonotsavebecausetheycannotaffordto.
Peopleonlowincomeshavedisposableincomesthatarebarelysufficientfortheirday-todayneedsandthereisnothingleftforsaving.However,researchersdebatewhetherthis
explanationisadequate.Whileinsomecasesitmaybetruethathouseholdsliterallyhave
nothingleftoverafterprovidingforthebasicsofshelter,food,clothingandheating,insome
casesafailuretosaveappearstobetheresultofaconsciousdecisiontospendallavailable
income.Savingseemssimplynottobeapriority.
ippr’sresearch
Thispaperreportstheresultsofresearchdesigned,inpart,toexaminehowlow-income
familiesmanagetheirbudgets.Itpresentssomeofthefindingsfromastudyoftheincome,
expenditure,savingandborrowingofasampleof58low-incomehouseholds,andfrom
interviewswiththosefamiliestodiscoverwhatdrivestheirbehaviour.Itexamineswhatlowincomehouseholdsunderstandby‘saving’;howlow-incomehouseholdssave;andhowthe
economiceventsofthelasttwoyearsmighthaveaffectedtheirsavingbehaviour.
Theanalysissuggeststhatlow-incomehouseholdsare,infact,goodatmanagingtheir
budgets.Whileafewdoadopta‘livefortoday’attitudeandarehappytospendalltheir
income(somethingthatistrueofallincomebrackets),mostsaytheywouldliketosave
moreinordertobuildastoreofassetsfortheirchildrenandtomaketheirfamilymore
resilient.Thesehouseholdsmightberesponsivetoproductsandincentivesthatwould
encouragethemtosaveand,importantly,toretaintheirsavingsuntiltheyarereallyneeded.
Iftheycanbeencouragedtobuildastoreofassets,itcouldmakethemmoreresilientto
shocksandsoimprovetheirwellbeing.
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Researchmethodology
Thefindingsinthispaperarebasedonresearchthat
employedaninnovativemethodology.Weinterviewed
58low-incomefamilies(seebox)withchildrenbelow
workingage,locatedinGlasgow,London,Newcastle
uponTyneandNottingham.Thefamiliesthen
completedadetaileddiaryofincome,spending,saving
andborrowingforamonthbeforeparticipatingin
furtherroundsofinterviews.Overall,eachfamily’s
experiencesweremonitoredoverafour-monthperiod,
makingitpossibletounderstandthedecisionsthe
familiesweremakingaroundspendingandsavingin
somedepth1.
Thesampleoffamilieswasselectedtocoverarangeof
householdsizesandtypes,withsomevariationin
ethnicityandemploymentstatus:
Howdowedefinelow
income?
Abroaddefinitionoflowincome
wasusedtoallowtheselectionof
arangeofhouseholds.The
selectioncriteriawerebasedona
measureofequivalentincome
(equaltobelow£226aweek,or
£11,752ayear,foracouplewith
onechild).Othercriteriasuchas
householdsize,ethnicityand
employmentstatuswerealso
considered.
•Therewere34two-parenthouseholds,22withasingleparentandtwolivingin
extendedhouseholds(withfamilyorfriends).
•Thefamilieshadbetweenoneandfivedependentchildren.
•45oftheheadsofhouseholds(self-selectedtoanswerquestionsonfamilyfinances)
werefemale2.
•Theageoftheparticipantsrangedfrom21to50yearsold.14respondentswereaged
between21and30,19between31and40,and25between41and50.
•50householdswerewhiteBritish,fourwereBritish-Asian,twoweremixedrace(white
BritishandWestIndian)andtwowerenotUKnationals(SriLankan).
•16ofthehouseholdsincludedsomeonewithadisability,reflectingtheprevalenceof
carersandthedisabledamonglow-incomehouseholds.
•22households(16ofthemtwo-parenthouseholds)hadmortgages.Twosingle
mothersandonecoupleownedtheirhouseoutright.33rented,ofwhich15hadtheir
rentpaidbyhousingbenefits(11ofthemsinglemothers).
Thesamplewasalsoselectedtoencompassthediversityofincomeamonglow-income
families,toallowforcomparisonsacrossdifferentsocialandeconomiccircumstances.Figures
1and2(nextpage)showhouseholdequivalentincomesforthefamilies,measuredbefore
andafterhousingcosts,andcomparethemtothemedianandpovertylineincomes.On
bothmeasures,aboutonequarterofthefamilieswerebelowthepovertylineandoverthree
quartersbelowthemedianincome.
Duringthecourseoftheresearch,theemploymentsituationinseveralhouseholdschanged,
creatingfluctuationsinlevelsofincomeandexpenditure,whichenabledtheresearchto
capturethefluidnatureofemploymentformanylow-incomefamilies,particularlyina
1.PrimaryresearchwasconductedbetweenDecember2008andMay2009.Face-to-faceinterviewswere
conductedinDecember2008andJanuary2009.Familieswerethenaskedtocompleteadiaryfora
month.BetweenFebruaryandMay2009,researcherscontactedparticipantsatregularintervalstoseeif
therehadbeenanysignificantchangestoincomeorexpenditure.Finalinterviewswereconductedin
AprilandMay2009with52families.Sixfamiliesdroppedoutinthelaterstagesofthestudybuthave
stillprovideddatafromtheearlierstages.
2.Thismighthavesomeeffectonthefindingsbecausepreviousresearchhasfoundthewaypeoplesave
isoftengendered.WestawayandMcKay(2007),forexample,foundonlymenlowtomoderateincome
familiesaredismissiveofthewholenotionofsaving.
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Figure1.
Household
weeklyincome
beforehousing
costs(2008)
Source:ippr
£1,200
£1,000
Equivalent weekly income
Median income
Poverty line
£800
£600
£400
£200
£0
Figure2.
Household
weeklyincome
afterhousing
costs(2008)
Source:ippr
£900
£800
Equivalent weekly income
£700
Median income
£600
Poverty line
£500
£400
£300
£200
£100
£0
recession.Atthestartoftheprojecttherewere10householdswithtwoadultsin
employment(thisincludedthetwoparticipantslivinginextendedhouseholds),29
householdswithoneadultinemploymentand17householdswithnoemployedadult.By
theendoftheresearchperiod–fourmonthslater–anumberofchangeshadoccurred,
bothinemploymentstatusandhoursworked.Oneparticipant–asinglemother–became
unemployed,twoparticipantslosttheirbusinessesandalsobecameunemployedandseveral
reportedthattheirworkinghourshadbeenreducedbytheiremployers.
Benefitsofsavingandassetownership
Thereareobviousfinancialbenefitstohavingsomereadily-accessibleassetsandtheseare
evenmoreapparentnowthattheeconomyisinrecession.School-leaversfacedwiththe
mostdifficultlabourmarketforyoungpeoplesincethemid-1980swillbebetterplacedto
pursuefurthereducationandtrainingopportunitiesortoaffordthedrivinglessonsthat
mightopenupextrajobopportunitiesiftheyhaveassetstohelpfundthem.Nowthatthe
mortgagemarkethascontracted,adultswillfinditeasiertobuyahouseiftheyhaveassets
thatcanbeusedasadeposit.Withunemploymentwidelyexpectedtoreach3millionin
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2010,peoplewholosetheirjobswillbebetterabletolookafterthemselvesandtheir
familiesiftheyhaveaccesstoadditionalfunds.Andretirees,whoarelivinglongerthanever,
willbeabletoenjoyabetterretirementiftheyhaveassetsthatcanhelpthemmaintaina
reasonablelifestyle.
However,thebenefitsofassetownershipextendbeyondthepurelymonetary.Michael
Sherradanhasarguedthatthesecurityprovidedbyownershipofassetsleadstoindividuals
makingbetterlong-termdecisionsandalsotogreatercivicengagementthroughhavinga
stakeinsociety(Sherraden1991).Thisconclusionhasbeensupportedbyevidencefromthe
UK.Previousippranalysissuggeststhatownershipofafinancialassetworthbetween£300
and£500atage23ispositivelycorrelatedwithmentalhealthandemploymentprospects10
yearslater(Bynner2001).Italsounderpinstheinterestof‘progressiveConservatism’in‘recapitalisingthepoor’(see,forexample,DavidCameron’sspeechtoDavosinJanuary2009).
Thereis,therefore,acasefortheGovernmenttoencourageallhouseholds,butparticularly
low-incomehouseholds,tobuildastoreofreadily-accessibleassets,andtoretainthemuntil
theyarereallyneeded.
Thisisalreadyhappening,orscheduledtohappen,toalimitedextentthroughpoliciesof
varioustypes:
•Providingassetsasaformofabenefit(theChildTrustFund)
•Matchingcontributionstosavingsschemes(theSavingGateway)
•Offeringtaxreliefforpensionsavings
•Settingupaccountsthatpeoplehavetooptoutof,ratherthaninto(personal
accountsforretirementsavings)
•Improvingfinancialunderstanding.
TrendsinsavingintheUK
HouseholdsintheUKhavebeensavinglessandlessoftheirdisposableincomes(aftertax
andNationalInsurancecontributions)forthelast15years.Thehouseholdsavingrate3
Figure3.UK
household
savingrate(%),
1960–2009
Source:Officefor
NationalStatistics
2009(see
www.statistics.gov.
uk/instantfigures.
asp)
16
14
12
%
10
8
6
4
2
0
-2
60 63 66 69 72 75 78 81
84 87 90 93 96 99 02 05 08
Year
3.Thesavingrateiscalculatedasdisposableincomelessconsumptionasapercentageofdisposable
income.Itcanfalleitherbecausehouseholdsaresavinglessoutoftheirincomesorbecausetheyare
borrowingmoretofinancespending.
9
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averaged8percentbetween1960and1998butsubsequentlyfelltoalowof-0.5percent
inthefirstquarterof2008.Theonsetoftherecessionhasseenthesavingratereversesome
ofitsdeclineandinthesecondquarterof2009itwasbackupto5.6percent.
Thisisquitetypical.Savingnormallyfallsinaboom,whenpeoplehavefewerfearsaboutthe
future,andincreasesinarecession,whentheyworrythattheymightlosetheirjobandfind
itdifficulttogetanotherone.
Severalexplanationshavebeenputforwardforthedeclineinthesavingrate.Thegreater
stabilityoftheeconomyovertheperiodfrom1993to2007,andthetransferof
responsibilityforsettinginterestratestotheBankofEngland,mighthaveencouragedsome
peopletobelievethattheyneededfewerprecautionarysavings;lowernominalinterestrates
mighthaveledsometobelievethatsavingwaslessworthwhile;adesiretoparticipateinthe
housingmarketboomencouragedmortgageborrowing;andtherewasamoregeneralsense
thatrampantconsumption,eveniffinancedbydebt,wasa‘goodthing’.
Ofcourse,thesefactorswerelargelyirrelevantforlow-incomehouseholds,whoweredoing
verylittlesavingintheearly1990sandhavelimitedaccesstoborrowingandsohadnoreal
scopetoreducetheirsavingrate.Changesinthenationalsavingratearelargelytheresultof
thebehaviourofmiddleandhigher-incomehouseholds.However,low-incomehouseholds
arenotcompletelyisolatedfromdevelopmentsintherestoftheeconomyandtheirchildren
arenotimmunefromthedesiretokeepupwiththeirpeers.
Asconsumerspendingintheeconomyboomedandaswechoseasasocietytodefine
ourselvesincreasinglybywhatweowned,low-incomefamilieswillhavefeltextrapressureto
spendmore,makingitevenharderforthemtosave.
Iworryaboutthefuturefinancially.Asandwhentheboysgetbigger,theywill
wantbiggerthingsandmoreexpensivethings,designerthings,becausethey
aregoingtogrowintoiteventually,becausetheycan’thelpwhotheyareat
schoolwith.(Female,32,Newcastle,two-parenthousehold,threechildren)
Savingbylow-incomefamilies
Thereisplentyofevidencethatdemonstratesthoseonlowincomesdolesssavingthan
thoseonhigherincomes.IntheUK,theFamilyResourcesSurveyshowsthat,in2007–08,
therewasaclearpositivecorrelationbetweenweeklyhouseholdincomeandtheprobability
ofahouseholdhavingabankorbuildingsocietyaccount,oranISA(IndividualSavings
Account)–seeFigure4.
100
Percentage with account
Figure4.
Savingsaccount
holding,by
income,2007–08
Source:
Departmentfor
Workand
Pensions(2009)
ISA
80
Other bank or building society account
60
40
20
0
Less than
£200
£200 to
£400
£400 to
£600
£600 to
£800
Weekly household income
£800 to
£1000
Over £1000
10
ippr|SavingandAsset-BuildinginLow-IncomeHouseholds
Unsurprisingly,itisalsothecasethatthevalueofsavingsincreaseswithincome.Figures
fromtheFamilyResourcesSurveyshowthat27percentofallhouseholdshadnosavingsin
2007–08andafurther20percenthadsavingsoflessthan£1,500(Table1).Fewerthan
halfofallhouseholdshaveputasidethethreetosixmonths’netpaythatmostadvisers
recommendtobetheminimumlevelofsavingthatisdesirable.
Amonglow-incomehouseholdssavingisevenlower.Almosthalfoffamilieswithweekly
incomesof£200orlesshavenosavingsatallandafurther17percentoffamilieshave
savingsoflessthan£1,500.
Table1:UKhouseholdsbyamountofsavingsandassetsandtotalweeklyincome(2007–08,%)
Totalweeklyhouseholdincome
Amountof
<£200
£200–400
£400–600 £600–800
£800–1,000 £1,000
savingsandassets
ormore
Nosavings
44
38
27
20
15
9
Lessthan£1,500
17
20
22
24
22
14
£1,500to£3,000
7
5
7
9
8
8
£3,000to£8,000
14
13
13
17
18
16
£8,000to£10,000
3
4
3
4
4
5
£10,000to£16,000 6
6
6
6
9
10
£16,000to£20,000 3
2
2
3
4
5
£20,000ormore
8
11
17
18
19
33
Source:DepartmentforWorkandPensions(2009)
All
27
20
7
15
4
7
3
17
PoliciestoencouragesavingintheUK
TheUKgovernmenthastakenactivestepstoencouragesavingoverthelastdecade.It
currentlysupportssavingandasset-buildinginanumberofways,discussedbelow.
Taxrelief
Thisisthemostimportantmethodofencouragement.Incometaxreliefforregistered
pensionschemescoststheExchequerabout£20billionayearinforegonerevenues(netof
taxpaidonpensionpayments),whilereliefforISAscostsafurther£2.5billion(HMTreasury
2008).Therearealsoanumberofsmallerschemesthatattracttaxrelief,atmuchlower
aggregatecoststogovernmentrevenues.Low-incomehouseholdsreceiveextremelylittleof
thisrelief.TheprogressivenatureoftheBritishincome-taxsystemmeanstaxreliefbenefits
mostlyhigherearnersandfewlow-incomehouseholdshaveISAaccounts.4
TheSavingGateway
Thisscheme,ontheotherhand,isdesignedspecificallytobenefitlow-incomehouseholds
whenitisintroducedin2010.PeoplewillbeeligibletoopenaSavingGatewayaccountonly
iftheyreceivecertainbenefitsortaxcreditsandhaveanincomelowenough.Account
holderswillbeabletosaveupto£25amonthfortwoyearsandattheendoftwoyears
theywillreceive50penceforevery£1saved,sotheycouldaccumulateasmuchas£900.
Pilotschemessuggestthatmatchingsavingsinthiswayencouragesparticipation.5 Itis
4.ThelatestdatafromtheFamilyResourcesSurvey,for2007–08,showsthatfewerthanoneinfour
householdswithatotalweeklyincomeof£300orlesshaveanISA(DWP2009).
5.Anevaluationofthepilotstudyfoundthatthreeintenparticipantswerenotregularsaverspriorto
theschemebutwereregularsaverstwoyearsaftertheiraccountsmatured.Inaggregate,60percent
agreedthattheschemehadhelpedthemtosaveregularlyeachmonth(IpsosMORI2009).
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ippr|SavingandAsset-BuildinginLow-IncomeHouseholds
estimatedthatthecostofthisschemewillbearound£130millionin2012/13(whenthe
firstmatchingpaymentsaremade),fallingto£70millionayearafteraninitialpeakin
demandpasses.
TheChildTrustFund(CTF)
Thisprogrammeprovideseverychildbornafter1September2002withavoucherfromthe
Governmentworth£250,togetherwithafurthervoucherworth£250whentheyreachthe
ageof7.Childreninlow-incomehouseholds(earninglessthan£15,575in2008–09)receive
doubletheseamounts.Fundscanbeinvestedinastakeholderaccount(equities)orina
cashaccount.Interestreceivedistax-freeandupto£1,200ayearcanbeaddedtothefund.
Onlythechildcanaccessthefundsintheaccountandthennotuntiltheir18thbirthday.
TheschemecosttheGovernment£0.25billionin2008–09,butthiswilldoublefrom
2010–11,thefirstfinancialyearinwhicheverychildreaching7yearsofagewillbeeligible
forthesecondpayment.NotethattheConservativeswouldwanttoreducetheprogramme.6
Workplacepensionschemes
From2012,employerswillberequiredtoautomaticallyenrolalleligibleemployeesintoa
workplacepensionschemeandmakeaminimumcontribution,tobematchedbya
contributionfromtheemployee.7 Iftheemployerdoesnothaveascheme,enrolmentwillbe
inthenewPersonalAccountsoccupationalpensionscheme,whichistargetedatlowto
middle-incomeworkers.Thebenefittoemployeesis,therefore,twofold:theyreceivetheir
employers’contributionsandtheygettaxreliefontheirowncontributions.Employeescan
choosetooptoutofthescheme,shouldtheysowish.
AlthoughchildreninpoorerfamiliesreceivelargerpaymentsintotheirChildTrustFunds,the
SavingGatewayschemeisdesignedspecificallytoincreasesavingamongthosewithlow
incomes,andPersonalAccountswillbelargelyheldbyemployeesonlowtomiddle-incomes,
thebulkofthesupportforsavingintheUKbenefitsthoseonhigherincomesthroughtax
relief.
Explainingsavingbehaviour
Atthispoint,itisagoodideatodefineexactlywhatisunderstoodbytheterm‘saving’.Itis
usefultodistinguishthreetypesofbehaviour8:
1.Copingwithunevenspendingpatternsthroughouttheyear: Mosthouseholdsspend
moreatcertaintimesoftheyear,especiallyChristmasandbirthdays,andwilltrytobudget
forthisoccurrence.Savingschemes,suchasChristmasclubs,havebeensetuptofacilitate
thistypeofsaving.Theevidenceisthatpeople,particularlythoseonlowincomes,regard
thistypeofbehaviourassaving,eventhoughthereisnointentiontoretainforanylength
oftimetheassetsthatareaccumulated.
2.Savingforshort-termprecautionaryreasons:Theprimaryaimofthistypeofsavingis
similartosavingforChristmas:toensurethatsomefundsareavailablewhenextraspending
isrequired.Thedifferenceisthatitisundertakenwithnospecificeventinmind,butinthe
knowledgethatwashingmachinesandcarsbreakdown,childrenneednewshoes,andso
6.GeorgeOsborne,theShadowChancelloroftheExchequerhassaidthatunderanyfutureConservative
Governmentonlydisabledchildrenandthepoorestone-thirdoffamilieswouldreceivenewChildTrust
Funds(Osborne2009).
7.Employeeswillcontributeaminimumof4percentofincome,employers3percentandtherewillbe
anextra1percentintaxrelief.Allemployeesaged22andoverandearningatleast£5,225(in2007/08
terms)willbecoveredbythenewscheme.
8.Othershavecomeupwithsimilargroupings.KempsonandFinney(2009)referto‘rainydaysavers’,
‘instrumentalsavers’,‘non-savers’and‘passivesavers’.
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ippr|SavingandAsset-BuildinginLow-IncomeHouseholds
on.Itis,therefore,differentfromlong-termasset-buildingbecausethereisaclearintention
tospendthemoney.
3.Longer-termassetbuilding:Themostcommonlong-termsavingpeopleundertakeisto
buildapensionforretirement.TheChildTrustFundschemeisanotherexample,asarethose
lifeinsurancepoliciesthatincorporateapayoutwhenthepolicymatures.Moregenerally,
anysavingsthatareretainedforalongperiodandareonlyaccessedinfrequentlyorin
extremecircumstancesfitintothiscategory.
Previousresearchsuggestslow-incomehouseholdsdoverylittleassetbuildingbutdosave
throughtheyearforspecificeventslikebirthdaysandholidays.Whatislessclearfromthe
literatureishowmuchsavingforshort-termprecautionaryreasonstakesplaceinlow-income
familiesandwhetherhouseholdswhoarenotsavinginthismannerareunabletodoso,or
aresimplychoosingnotto.
Thisisanimportantdistinction.Themostcommonreasongivenfornotsaving,orfornot
savingmore,isaninabilitytoaffordit(seeFigure5).
Figure5.What
stopspeople
savingmore?
(Spring2009)
Source:National
Savings&
Investments
(2009)
I can't afford to save/my
outgoings prevent me from
saving
I don't think I need to save
more
I don't see the need to save
2%
8%
5%
5%
I don't have time to sort it out
6%
I don't trust financial providers
53%
I find saving too confusing
21%
Don't know
Ofcourse,therearelow-incomefamiliesthatarenotsavingbecausetheytrulycannotafford
it.Typically,suchfamilieswillhaveotherfinancialproblems–payingoffdebts,difficultiesin
payingutilitybills–andwillbestrugglingtofindthemoneytheyneedforsuchbasicsas
food,clothingandshelter.
Ihaveneverreallyhadanysavings;I’venotreallyearnedenoughtohaveany
savings.(Female,30,Glasgow,two-parentfamily,threechildren)
Manyofthelow-incomefamiliesinoursurveyhadlittlemoneyleftoverafterspendingon
basicitems.Figure6showstheexpenditurebreakdownofoneofthefamilies.Overthefourweekperiodforwhichtheycompletedanincomeandexpenditurediary,theirspendingwas
7percentgreaterthantheirincome.Four-fifthsoftheirincomewasspentonhousingcosts,
includingutilitybills,debtrepaymentandfood.
Butcanthisbetrueofoveraquarterofthepopulation,asimpliedbyTable1above?Some
peoplewhosaytheycannotaffordtosavereallymeansavingisnotahighpriorityforthem.
Forthisgroup,savingistypicallyseenasanoptional,residualactivity–somethingthat
mightbedonewithanymoneyleftoverattheendoftheweekormonth.
13
ippr|SavingandAsset-BuildinginLow-IncomeHouseholds
Figure6.
Expenditureasa
percentageof
incomeofa
couplefromthe
ipprsample,one
inwork,with
threechildren,
Newcastle,2009
Source:ippr
120%
Other
100%
21%
80%
7%
12%
60%
14%
40%
25%
20%
11%
Children's pocket
money
Utilities
School/work meals
Food
Debt repayment
17%
Rent
0%
Economistsintheneo-classicaltraditionwouldsaythatthesepeoplehavea‘revealed
preference’forspendingoversaving.Neo-classicaleconomicmodelsassumeindividuals
alwaysactrationallyandsuggestthattheprimedeterminantsofsavingareageandincome
(theso-called‘life-cycle’hypothesis).Inaneo-classicalworld,whatpeoplesayabouttheir
desiretosaveisirrelevantiftheirbehaviourrevealsthatspendingisthegreaterpriority.This
doesnotmeanthatpeoplewillnotreacttoincentivestosave–suchastaxbreaks–but
mostneo-classicaleconomistsarguethatsuchincentivesdistortthemarketandsoshould
notbeprovided.
However,theassumptionsofneo-classicaleconomics–inparticulartheideathatpeople
alwaysbehaveinarationalmanner–areincreasinglyquestioned.Supportersofbehavioural
economictheoryarguethatfinancialdecisionsareinfluencedbyanumberofcommon
humancharacteristics,suchas‘lackofself-control,limitedcognitiveabilities,inertia,the
tendencytointerpretdefaultoptionsas“advice,”andthetendencytousemental
accountingtechniques’(Beverlyetal 2008,p.ES-1).Oncetheseinfluencesareaccepted,it
followsthattherecanbearoleforincentivestosaveandtoaccumulateassets.9
KempsonandFinneyidentifythree‘meta-barriers’toformalsavingbylow-income
households,relatingto‘access’,‘knowledgeandunderstanding’andthe‘attractivenessof
formalproducts’(KempsonandFinney2009,p.viii).Theyarguethatlow-incomehouseholds
wouldbemorelikelytosaveformallywithproviderstheytrusted,suchasthePostOffice
andcreditunions,ifproductsweresimplertounderstand–forexample,offeringbonuses
ratherthaninterestpayments–andiftheyofferedincentivesnottomakewithdrawals,while
atthesametimeallowingaccesstomoneyifitisreallyneeded.
AttitudestotheChildTrustFundalsorevealbehaviouralbarrierstosaving.Inastudyby
Prabhakar(2007),whenparentswereaskedwhethertheywouldprefertoreceiveextrachild
benefitforoneyear(roughly£5aweek)insteadofa£250paymentintoaChildTrustFund,
theyoptedfortheTrustFundpaymentonthegroundsthatthechildwouldbenefitmore
fromthesavingsinthefuturethanfromtheimmediateextraincome.Low-incomefamilies
alsoagreedthatitwasbettertoreceive£500ofsavingsratherthan£10aweekextrachild
benefitforayear.However,alltheevidencesuggeststhatlow-incomefamilies,givenan
increaseof£10aweekinchildbenefitpayments,wouldnotchoosetosavethemoneyinto
theirchild’sTrustFund.Low-incomehouseholdstendonlytochoosesavingoverspending
whenitisthedefaultoption.
Othershavefoundevidenceofastrong‘compartmental’approachtosaving.AnAmerican
studyintotheeffectofindividualdevelopmentaccounts(IDAs)10 foundtheyencouraged
9.SeeAppendix2forexamplesofsavingsproductsthathavebeenconstructedalonglinessuggestedby
behaviouraleconomics.
10.Savingsaccountsforlow-incomepersonsthatencouragesavingforaspecificpurposebyproviding
matchingfundswhenfundsarewithdrawnforanallowablereason(e.g.topayforeducationortraining).
14
ippr|SavingandAsset-BuildinginLow-IncomeHouseholds
savingandproducedbetterlifeoutcomes.Inparticular,afterthreeyearsinthescheme,
participantsweremorelikely–afteradjustingforotherfactors–tobehomeowners,toown
orhavepart-ownershipofabusinessandtohavepursuedpost-secondaryeducation(Millset
al 2008).
IntheUK,asignificantproportionofparents(orrelativesandfriends)takeadvantageofthe
optiontoputextramoneyintoChildTrustFunds.Almostoneinthreefundsthatwere
openedbyparentshavereceivedsomeextramoney,fallingtooneinfiveofaccountsthat
wereopenedbyparentsandeligiblefortheextra£250(thatis,low-incomehouseholds).
Table2:ChildTrustFund:Accountsreceivingcontributionsfromparentsandothersin2007/08
(%ofallaccounts)
Openedbyparent OpenedbyHMRC* Allaccounts
Receivingextra£250payment
20%
1%
14%
Notreceivingextra£250payment 35%
3%
29%
Allaccounts
31%
2%
24%
*HMRC=HerMajesty’sRevenueandCustoms
Source:HMRC(2008a)
Whatismore,theevidencesuggeststhattheexistenceoftheChildTrustFundis
encouragingextrasaving.TheChildren’sMutual–aleadingproviderofChildTrustFunds–
claimsthatamongitscustomerstherehasbeen‘atreblingintherateofsaving’frompreChildTrustFundlevelsand‘lowerincomefamiliesareamongstthemostengaged,with30%
toppingupmonthly’(TheChildren’sMutual2009).
Researchfindings
Almostallthelow-incomefamiliesintheipprsurveyusedoneormorefinancialproducts,
withthemostcommonbeingacurrentaccount,eitherwithorwithoutanoverdraftfacility
(onlyonefamilysaidtheyhadneither).Justoverhalfalsohadasavingsaccountbutonly
oneineighthadanISA,withthesameproportionsayingtheyhadotherinvestmentsor
premiumbonds.
Figure7.
Financial
productsused
byfamiliesin
thesample
(2009)
Source:ippr
Current account w/o overdraft
Current account with overdraft
Debit card
Direct debits
Savings account
ISA
Investments/premium bonds
0
20
40
60
% of families
80
100
15
ippr|SavingandAsset-BuildinginLow-IncomeHouseholds
Disaggregatingbyincomeyieldedsomeinterestingresults.Familieswiththelowestincomes
withinoursurveyweremorelikelytohaveacurrentaccountwithoutanoverdraftfacility;
thoseonhigherincomesonewithsuchafacility.Theproportionoffamilieswithasavings
accountalsoincreasedwithincome.Nofamiliesinthelowestquartile,byincome,hadan
ISAorotherinvestmentsorpremiumbonds(nordidanyofthefamilieswithnoonein
employment)11.
Figure8.
Financial
productsused
byfamiliesin
thesample,by
income(2009)
Source:ippr
Current account w/o overdraft
Current account with overdraft
Debit card
Direct debits
Savings account
ISA
Investments/premium bonds
0
Poorest quartile
10
2nd quartile
20
30
3rd quartile
40
50
4th quartile
60
70
80
90
100
% of f amilies
Althougharoundhalfofthelow-incomefamilieshadasavingsaccount,inseveralcases
therewasverylittlemoneyintheseaccounts.Insomeinstances,theaccounthadnotbeen
activelyusedformonths.
Thatsavingsaccountwouldalwayshave£50inorsomethingforemergencies.
Ithasn’thadanythinginforabsolutelymonths,probablyayear.(Female,28,
Newcastle,two-parentfamily,twochildren)
Wheninterviewed,thelow-incomefamiliesgenerallydisplayedapositiveattitudetotheidea
ofsaving.Thesefamiliesinterpreted‘saving’asanybehaviourthatdidnotinvolvespending
alltheirincomeinaparticularweekormonth.Puttingsomesparechangeinajarinthe
kitchenwassaving,justasmuchasmakingadepositintoasavingsaccount.Onlyaveryfew
saidthattheydidnotsaveandthattheythoughttherewasnopointindoingso.Most
expressedsomedesiretosave,thoughmanysaidthattheywerenotdoinganysavingatthe
timeofthestudybecausetheycouldnotaffordto.Unsurprisingly,thesefamiliestendedto
beamongtheonesinoursamplewiththelowestincomes.
Therecessionhashadsomeeffect.Intwoinstances,familiessaidthattheyusedtosavebut
hadnotbeenabletodosobecausethemainwage-earnerhadbeenmadeunemployed.A
smallnumberofotherfamiliesreportedthattheirincomeshadfallenduetoworkingfewer
hoursandthishadaffectedtheirsavingbehaviour.
Mysavingsarenearlyallgoneaway.Wehadnearly£3,000betweenusin
ISAsandwe’renowleftwith£600.Savinglikethatwas,wekeptsaying,fora
rainyday.Wekeepsaying‘it’sbeenrainingforeverthislastfewmonths’.
(Female,34,Glasgow,two-parentfamily,threechildren)
11.Chartsshowingtheuseoffinancialproductsaccordingtoothercharacteristicsofthefamiliesinour
survey(employmentstatus,location,familysizeetc.)canbefoundinAppendix1.
16
ippr|SavingandAsset-BuildinginLow-IncomeHouseholds
Butwhenaskedabouttheeffectoftherecession,overtwo-thirdsoffamiliessaidthat
theirbiggestproblemwasthehighpricesoffoodandenergy.12 Atthetimeofthe
research,foodpriceinflationwasabove10percentandenergypriceinflationcloseto15
percent.13 Forfamiliesonlowincomesandtightbudgets,increasesofthesemagnitudes,
whichwerenotmatchedbyhigherincomes,createdhugeproblems.Mostregardsaving
asaresidualactivity,somethingthattheydoiftheyhaveanysparecashleftattheend
oftheweekormonth.Somehouseholdsthathadpreviouslybeenabletosavefound
thattheydidnothavemoneylefttodosonowbecausetheywerespendingmoremoney
onfoodandenergy.Forexample:
We’venotbeenabletoputany[money]in[tooursavings].We’re
spendingsomuchintheshopsandsupermarketsandonbills...(Female,
46,Nottingham,two-parentfamily,twochildren)
Mostofthesavingthatwasbeingdonebyfamiliesinthestudywasforspecificreasons.
ThemostcommonlymentionedwereChristmas,birthdaysandholidays(sometimes
savingtopayforaholiday;sometimessavingtohavealittleextratokeepthechildren
amusedduringtheschoolsummerholidays).Thefollowingquoteswerefairlytypical:
ThemoneythatIputawayisforspecificpurposes,likeoneofthemwill
payoffadebtinJuly.(Female,44,Nottingham,single-parentfamily,three
children)
I’venotbeenoneforsavinglong-term.Icansaveforapurpose.(Female,
33,Newcastle,single-parentfamily,twochildren)
BecausetheinterviewswereconductedclosetoChristmas-time,familieswereasked
specificallyabouthowtheycopedwiththeextraspendingatthattimeofyear.Forone
family,whowerealreadyspendingwellabovetheirincomeandsowereunlikelytosave
anytimesoon,Christmasshoppingstilltookaquarteroftheirincome–seeFigures9
and10.
Figure9.
Expenditureasa
percentageof
incomeofa
couplefromthe
ipprsample,
bothinwork,
twochildren,
Nottingham
Source:ippr
160%
140%
26%
120%
17%
100%
9%
9%
13%
80%
13%
60%
15%
Other
Council tax
Car running costs
Childcare
Food
40%
55%
20%
Christmas shopping
Debt repayments
Mortgage/rent
0%
12.Higherfoodandenergypriceswerenotactuallyaresultoftherecession:theywerecausedbythe
precedingboom,especiallyinlargeemergingeconomies.Buttheydidplayapartintippingtheeconomy
intorecession,soitisunderstandablethatpeoplerefertothemwhenaskedabouttherecession.
13.AccordingtotheOfficeforNationalStatistics,inflationforfoodandnon-alcoholicbeverageswas
10.4percentinDecember2008,whileinflationforhousing,water,electricity,gasandotherfuelswas
14.3percent.
ippr|SavingandAsset-BuildinginLow-IncomeHouseholds
Figure10.
Weeklyincome
andexpenditure
forfamilyas
above
Source:ippr
£1,400
£1,200
Weekly spending
17
£1,000
£800
£600
£400
£200
£0
1
2
3
4
Week
Income
Expenditure
AbouttwothirdsofthefamiliessaidthattheyhadsavedspecificallyforChristmas.Mostof
theremaininghouseholdshadtakenonextradebt(acoupleofhouseholdsmentionedboth
savingandtakingonextradebt).Thissuggeststhatthemajorityoflow-incomefamiliesare
relativelygoodatcopingwiththeunevenpatternofspendingthroughouttheyear.Forthe
minority,though,theChristmasperiodcausesincreasedlevelsofstressandanxiety,
particularlyamongfamilieswhofelttheyweredeprivingtheirchildren:
Christmaswillbeverytight.It’smygrandson’sfirstChristmasandI’mfeeling
veryguiltythatIcan’tspendwhatIwanttospendonhim. (Male,42,
Nottingham,two-parenthousehold,twochildren)
Similarproblemsalsooccuraroundthetimeofchildren’sbirthdaysandtheschoolsummer
holidays.
Thefamiliesinthisstudywereusingarangeofsavingsdevices,includingChristmasclubs,
givingthemoneytoafriendoranotherfamilymemberandjarsandtinsinthekitchen:
TheonlytimeIsaveiswhenwearegoingonholiday.AndallIdois–itis
quitesadreally–Iputallmychange,20p,10p,5p,2p,1p,50pallinapot.
Andwhenwearegoing,IchangeitupandIsplitthatbetweenmykids.
(Female,30,London,single-parentfamily,twochildren)
Havingsomeregularcommitment,andhandingthemoneyovertosomeoneelsetolook
after,areseenasimportantbecausetheytakeawaythetemptationtodipintomoneybefore
itissupposedtobespent.However,mostofthesavingbeingdonewasinformal,ratherthan
throughfinancialinstitutions.Inafewinstances,thiswasamatteroftrust,whichseemedto
centreonfearsthatbanksmightcollapse.Inmanycases,however,itwasjustamatterof
convenience.SeveralofthefamiliesinGlasgowmentionedcreditunionsasaconvenient
alternativetoHighStreetbanks:
Ijustputthatmoneyawaywiththecreditunion.IfIneeditforanythingIcan
goandgetit.It’sgoodtohaveitthere.(Male,44,Glasgow,single-parent
family,onechild)
Interestingly,despitethewell-publicisedcollapseofChristmassavingclubFarepakin2006
(see,forexample,Guardian2006),low-incomefamiliesstillfindsimilarsavingschemes
attractive.OneoftheintervieweeshadbeenanagentforFarepakwhenitcollapsed(andso
hadlostmoneyalongwithfamilymembersandfriendsthatshehadsignedup),butshewas
happytouseacompetitorscheme:
18
ippr|SavingandAsset-BuildinginLow-IncomeHouseholds
WhatIdidlastyearwasIsavedwithParkHampers.Theyhavegotsomesort
of[government]guarantee.(Female,33,Newcastle,single-parentfamily,two
children)
Therewaslessevidenceofshort-termprecautionarysaving,withlessthanaquarterof
familiessayingthattheywereabletoputmoneyasideforunexpectedevents.Eventhen,a
fewacknowledgedthattheywereoftentemptedtodipintothis‘rainyday’moneybecause
itwasnotbeingkeptforanyspecificpurpose.Therewassomeevidencetosuggestfamilies
understoodtheyweremakingachoicebetweenspendingandsavingandchoosingnotto
prioritisesaving:
Isupposewecouldcutoutthatsortofthing[havinga‘ChineseoranIndian
orapizza’onaSaturday].Wecouldsave,youknow.Icouldsavemaybe15
quidaweekevenifwedidn’thavethatonaSaturdaybutthenIthink,well
that’sliving,isn’tit.(Female,Newcastle,two-parentfamily,twochildren)
Others,though,simplythoughtthattheycouldnotaffordtosave:
Tobeabletosavetodaypeoplehavegottobeonmorethan£25,000ayear.
Inoursituation–twoadultsandthreechildren–you’vegottobeona
minimumof£25,000ayear.That’sbasicallysoyoucanliveanormallifeand
save.I’mnotsayingastronomicalamountsbuttheodd£50nowandagaina
weeksaved.(Male,47,Nottingham,two-parentfamily,threechildren)
Thelackofprecautionarysavingleaveslow-incomefamiliespoorlypositionedtocopewith
‘shocks’.Inthecourseoftheinterviewsforthisstudy,10familiesreportedshocksinthe
formofunexpectedspendingduetothebreakdownofahouseholditem(includinga
refrigerator,boiler,washingmachineandoven).Inonlyoneinstancedidthefamilyhave
savingsthattheycouldusetopayforrepairsorareplacement.Inonecase,areplacement
wasboughtfromacatalogue.Intheothereightinstances,thefamiliestookonmoredebt,
eitherbyusingtheircreditcard,borrowingfromfamilyorfriendsor,inonecase,applyingfor
acrisisloanfromtheGovernment.Familiesthathadtocopewiththeshockofsomeone
losingtheirjobwere,ofcourse,evenworseplaced.
Onlyahandfulofthelow-incomefamiliesinthisstudyweresavingforthemediumterm.To
most,itwasinconceivablethatanyonewouldthinktheywereinapositiontodoso,though
somedidexpressadesiretosavefortheirchildren:
Iftheywanttodocollege,university,youknowtheyhavegotthemoney
behindthem.That’swhatIwouldliketodo,tosetup.(Male,47,London,
two-parentfamily,threechildren)
Onefamilywasmanagingtosavetheirchildbenefitmoneyinanaccountfortheirdaughter
andanotherwasputting£10aweekintoachildsavingsaccount.Therewasvirtuallyno
referencetolong-termsaving,suchasforpensions.
Conclusions
Thisresearchhasshownthatlow-incomefamilieswouldbenefitfromincreasingtheir
savings.Whilemostofthefamiliesinthestudyaregoodatcopingwithadditionalspending
onexpectedevents,suchasChristmas,birthdaysandschoolholidays,fewhavebuiltupa
‘rainydayfund’andmosthavetocopewithunexpectedeventsbyresortingtotakingon–
oftenexpensive–debt.Whilemanyfamilieswouldclaimthattheycannotaffordtosave,
somewerewillingtoadmitthattheydidnotchoosetosavebecausetheyattachedahigher
prioritytospending.Precautionarysavingandlong-termasset-buildingareseenasoptional,
residualactivities.
19
ippr|SavingandAsset-BuildinginLow-IncomeHouseholds
Thissuggeststhatthereisscopetochangebehaviourandincreasesavingactivity,perhaps
throughtheuseofsomeoftheideasofthebehaviouraleconomists,suchasauto-enrolment
andincentives.IfpeoplearepreparedtosaveforChristmasthroughinformalschemeslike
hamperclubsandforholidaysbyplacingmoneyinajar,itmightbepossibletopersuade
them,withtherightincentives,tosaveforothereventualitiestoo.
IsaveforChristmasallyearandIsaveforholidays.(Female,43,Nottingham,
single-parentfamily,threechildren)
Oneofthefamiliescameup,unprompted,withtheirownpolicysuggestionalongthese
lines:
TheGovernmentcouldsetupanoptiontoputtaxcreditsintoasavings
scheme. (Female,38,Newcastle,single-parentfamily,threechildren)
Thus,thereappearstobeanappetiteforaframeworkofsupportandadviceaboutthe
benefitsofsavingandtheproductsavailabletolow-incomefamilies.
Recommendations
Ourresearchsupportstheviewthatlow-incomefamiliesneedtosavemoreandtoretain
theirsavingsforlonger.However,italsoconfirmsevidencefromotherstudiesthat
families(notjustlow-incomefamilies)oftenrealisetheimportanceofsavingstoolate.
Thissuggeststhereisaroleforpolicymakerstoputinplacepoliciesthatwillbroaden
savingandassetownershipopportunitiesforlow-incomehouseholdsandforsuppliersof
financialservicestodesignproductsthataremoreattractivetothem.Inthisway,
policymakersandproviderscanbuildontheindividualsavingbehaviouroflow-income
families.
Ifgovernmentandprovidersofsavingsproductswanttobroadensavingandasset
ownershipopportunitiesforlow-incomefamilies,thereareplentyofideas,experiments
andevidencefromothercountriestodrawon(seeAppendix2forafewexamples).And
thebulkofthisevidencesuggeststhatthebestproductscombinemakingsavingaseasy
aspossible–oftenincludinga‘nudge’throughauto-enrolment–withincentivesto
retainsavings,forexamplethroughmatching.Productswiththesefeaturesshouldbe
availableintheUKthroughoutlifeforthevarioussavingsneedsthatfamilieshave.
Asastart,theGovernmentcouldprovideanincentivetoencouragelow-incomefamilies
tomakeextrasavingsintoChildTrustFunds.Forexample,itcouldpromisetomatch,ata
rateof50pforevery£1,anysavingsmadeintoaChildTrustFund,uptoalimitof£100
perchildperyear,forthosechildreninthepoorestone-thirdoffamiliesandfordisabled
children.PilotstudiesfortheSavingGatewayschemeshowthatthistypeofincentive
canproduceasignificantchangeinsavingbehaviour.Eveniftheresponseisveryhigh,
thetotalcostofthesechangeswouldbeonlyaround£100millionnow(eventuallyrising
to£250million).Thiswilldemonstratetheimportancegovernmentattachestosavings
andensurethateverychildhasasizeablelumpsumwhentheyreachtheageof18,
mitigatingtheriskofChildTrustFundsexacerbating,ratherthanreducing,asset
inequalitiesat18.
However,itisalsoimportantfortheGovernmenttoencouragepeopletobuildastoreof
assetsforwhentheyarereallyneeded.Thiswillnotnecessarilybeachievedif18-yearoldssimplyspendtheirfundsassoonastheirChildTrustFundsmature.TheGovernment
should,therefore,establishanewcategoryofapprovedaccountintowhichmaturing
ChildTrustFundmoneywillbeautomaticallytransferred.AswithChildTrustFunds,
interestandcapitalgainsinthisaccountwouldbetax-free.Itcouldalsobelinkedwith
otherschemesdesignedtoencouragesaving.Forexample,therecouldbeincentivesto
20
ippr|SavingandAsset-BuildinginLow-IncomeHouseholds
transferfundsfromaSavingsGatewayaccountintotheapprovedaccount.Indeed,the
newaccountcouldbeareformedversionoftheSavingGateway.Followingthe
suggestionofoneofthefamiliesinthesurveyconductedforthisresearch,taxcredits
couldalsobepaidintotheseaccounts.14
Thepurposeofthisnewaccountwouldbetoencouragelong-termasset-buildingforspecific
purposes–suchasthedepositneededtobuyaproperty–asdistinctfromshort-term
savingforChristmas.Forlow-incomefamiliesthismightbeunderlinedbyproviding
matchingfundswhenmoneyiswithdrawnforanallowablereason(forexampletopayfor
educationortraining,ortobuyafirstproperty),asisthecasewithindividualdevelopment
accountsintheUnitedStates.
Theapprovedaccountshouldbesimpleandavailablefromarangeoftrustedandeasy-toaccessproviders,includingthroughthePostOfficeandcreditunions.Providersshouldplay
theirpartbyensuringthatthesenewfundsareparticularlyattractivetofamiliesonlow
incomes.Somelow-incomefamiliespreferanaccountwithapassbook,soitiseasyto
monitortheirsavings,othersarehappytousetheinternetorhaveatelephoneaccount.All
theseoptionsshouldbemadeavailabletoenhancechoice.
Theaccountsshouldprovideincentivesforkeepingmoneyintheaccount,whileallowing
someflexibilitytowithdrawitandtheymightpaya‘bonus’ratherthanarateofinterest.If
theyweresubjecttoacapontheiroverallsize,theycouldalsobeexcludedfromcalculations
ofassetholdingswhenassessingbenefitlevels(oneofthereasonssomepeopledonotsave
isthroughafearthatitmightaffecttheirfutureentitlementtobenefits).
Thetotalcostofthevariousincentivesandotherpaymentsembeddedinthisproposal
woulddependontheirscopeandsize.Theywouldalsoonlybuildupoveranumberof
years.However,theycouldeasilybefundedbylimitingtaxreliefonpensioncontributionsto
thebasicrateforeveryone,notjustthosewithanannualincomeof£150,000orhigher(as
plannedfrom2011–12).ThismeasurewouldincreaseGovernmentrevenuesbyover£10
billionayear.Itwouldbeaprogressivemeasuretousesome–orall–ofthismoneyto
providesavingincentivestothoseonlowerincomes.
Atthisstage,however,thedetailsarelessimportantthanidentifyingthebroaddirectionof
travel.Ourstudyoflow-incomefamilieshashighlightedtheirvulnerabilityduetoalackof
precautionarysavingsandtheirinabilitytobuildupastoreofassetsthatwouldincrease
theiropportunitiesinlife.WearguethattheGovernment–helpedbyprovidersofsavings
products–coulddomoreforthesefamilies.Alongsidebetterfinancialeducation,they
shoulddevelopmoreproductsthatmakesavingaseasyaspossible(orevenautomatic)for
low-incomefamilies,whileprovidinganincentiveforsavingstoberetainedthrougha
savingsmatch.
14.ThecurrentSaveAsYouEarn(SAYE)scheme,whichallowsemployeestosavebetween£5and£250
amonthforafixedperiodoftimeandgivesthemtheoptiontobuysharesintheircompanyataprearrangedprice,couldalsobeexpandedtomakeitattractivetolowearners,perhapsbyallowingsome
flexibilityovercontributionsandwithdrawalsfromtheplan,andlinkedtothisnewaccount.
21
ippr|SavingandAsset-BuildinginLow-IncomeHouseholds
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ippr|SavingandAsset-BuildinginLow-IncomeHouseholds
Appendix1:Savingsproductsusedbyfamiliesinour
sample
FigureA1.
Financial
productsusedby
familiesinthe
sample–by
location
Current account w/o overdraft
Current account with overdraft
Debit card
Direct debits
Savings account
ISA
Investments/premium bonds
Glasgow
FigureA2.
Financial
productsusedby
familiesinthe
sample–byage
0
London
20
Newcastle
40
60
Nottingham
80
% of families
100
Current account w/o overdraft
Current account with overdraft
Debit card
Direct debits
Savings account
ISA
Investments/premium bonds
0
10
20 to 29
20
30
30 to 39
40
50
40 plus
60
70
80
90
% of families
100
23
ippr|SavingandAsset-BuildinginLow-IncomeHouseholds
FigureA3.
Financial
productsusedby
familiesinthe
sample–by
numberof
children
Current account w/o overdraft
Current account with overdraft
Debit card
Direct debits
Savings account
ISA
Investments/premium bonds
0
FigureA4.
Financial
productsusedby
familiesinthe
sample–by
householdtype
10
20
One
Two
30
40
50
60
70
Three or more
80
90
100
% of families
Current account w/o overdraft
Current account with overdraft
Debit card
Direct debits
Savings account
ISA
Investments/premium bonds
0
10
20
Tw o-parent
30
40
S ingle-parent
50
60
70
80
90
% of fam ilies
100
24
ippr|SavingandAsset-BuildinginLow-IncomeHouseholds
FigureA5.
Financial
productsusedby
familiesinthe
sample–by
rentingor
owningproperty
Current account w/o overdraft
Current account with overdraft
Debit card
Direct debits
Savings account
ISA
Investments/premium bonds
0
10
20
Renting
FigureA6.
Financial
productsusedby
familiesinthe
sample–by
employment
status
30
40
50
60
70
With a mortgage
80
90
100
% of families
Current account w/o overdraft
Current account with overdraft
Debit card
Direct debits
Savings account
ISA
Investments/premium bonds
0
Employed (single parent)
Both working
Both unemployed
10
20
30
40
50
60
Unemployed (single parent)
One parent working
70
80
90
% of families
100
25
ippr|SavingandAsset-BuildinginLow-IncomeHouseholds
Appendix2:Internationalexamplesofsavingsproducts
designedtoincentivisesaving
Behaviouraleconomistshavetriedtobreakdownbarrierstosavingforlow-incomefamilies
bydesigningsavingsschemesthattakeadvantageofhumannatureandsoleadtohigher
participation.Theseschemesusuallyincorporateautomaticenrolment–addressingpeople’s
inertiainmattersfinancial–combinedwithincentivesto‘nudge’peopleintosaving.Three
examplesfollowbelowofhowtheirideascanworkinpractice.
SaveMoreTomorrow(UnitedStates)
UndertheSaveMoreTomorrowschemedesignedbyRichardThalerandShlomoBenartzi,
employeescommittostartortoincreasetheirsavingbyagreeingthataproportionoffuture
payincreasesshouldbetransferredintoasavingaccount,ratherthanintotake-homepay
(withanopt-outatanytime)(ThalerandBenartzi2004).Theschemeworkswith
behaviouraltheorybecauseitavoidsacutincurrentnominaltake-homepay,sopeopledo
nothavetosacrificesomecurrentspending;itrequiresanadvancecommitment,solimiting
thepossibilityofpeoplefindingsomethingelsetodowiththemoney;itreliesoninertiato
keeppeopleinthescheme;butgivesthemanopt-outsothattheydonotfeeltrapped.In
onetrial,80percentofpeoplestayedintheschemethroughfourpayincreases.
Thisisnotdesignedtobeauniversalsolutiontotheproblemoflowsavingamongthoseon
lowincomes,becauseitisbestsuitedforthoseinastablejob,butitcouldworkinthe
publicsector,forexample,andshowshowacceptingtheneedforincentivescanleadto
innovativeproductdesign.
KiwiSaver(NewZealand)
TheKiwiSaveraccount,recentlyintroducedinNewZealand,combineselementsofautoenrolmentandincentives.AnyonetakinganewjobinNewZealandnowautomaticallyhasa
KiwiSaveraccountopenedforthem(thosealreadyinjobscanchoosetoopenone).The
governmentkick-startsaccountswithadepositofNZ$1,000(about£450).Italsomatches
employeecontributionsuptoalimitofNZ$1042.86ayear(NZ$20aweek).Employershave
tomatchemployeecontributionsuptoatleast2percentofsalary(unlesstheyare
contributingtoanalternativepensionscheme).If,despitealltheseincentives,someone
wantstooptoutofthescheme,theycanchoseto,butonlyiftheydosowithineightweeks
ofstartingwork.Althoughtheaccountsareprimarilyavehicleforpensionsaving,one
withdrawalisallowedtopurchaseafirsthomeandafirsthomedepositsubsidyofupto
NZ$5,000isalsoavailable.
SuperannuationGuarantee(Australia)
TheAustralianSuperannuationGuaranteehasbeeninexistencesince1992.Employershave
tomakecompulsorycontributionstoasuperannuationfundonbehalfoftheiremployees.
Contributionswereinitiallysetat3percentofincome,buthavesincebeenincreasedto9
percent.Employeescanaddtheirownvoluntarycontributions,whichattracttaxrelief,on
top.Thefundcanonlybeaccessedonretirement(exceptincertainextremecasessuchas
seriousillness).Becausealmostallworkersarecoveredbythescheme,ithasledtoincreased
pensionprovisionforthoseonlowincomes.