Families need £1,000 ‘buffer’ to 
avoid problem debt, charity warns

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Cash prizes, credit union accounts for schoolchildren and tweaking the auto-enrolment system should all be used to encourage people to save more and avoid problem debt, according to a debt charity.

StepChange says that British families are facing a savings crisis and in a new report is calling for a range of measures to help the estimated seven million UK households that do not have emergency funds of £1,000.

That’s the amount the charity says every family should have set by to help them cope with a “rainy day” – in other words, unexpected outgoings or an unforeseen interruption in earnings due, for example, to illness or temporary unemployment.

According to a YouGov survey commissioned by the charity, there are nearly 22 million UK adults who are not confident that they are saving enough to cope under such circumstances.

StepChange says the consequences of not having such a financial cushion when that “rainy day” comes can be far-reaching, with implications for labour market participation, marital breakdown, and health.

It also stresses that the lack of financial resilience among households with no savings is worse for younger families on low-moderate incomes, living in rented accommodation or with young children.

The report’s author, Joseph Surtees, who is a senior public policy advocate for StepChange Debt Charity, said the social implications could be extensive.

“The impacts of problem debt on family life can be catastrophic. People cut down on everyday basics just to pay their debts, and in extremis it leads to people having their electricity cut off, being evicted and facing bankruptcy.

“There can also be really quite extreme mental health issues involved too; one in four people with problem debt have a mental health issue. The stress levels associated with problem debt can make holding down a job more difficult, and once a job is lost, they can make finding a new one more difficult too.”

In research published last year, StepChange showed that if every household in Great Britain had at least £1,000 saved it would reduce the number in problem debt by 500,000.

Its latest report, titled Becoming a nation of savers: Keeping families out of debt by helping them prepare for a rainy day, noted: “Considering problem debt comes with a social cost of £8.3bn, the value of helping families save would be considerable.”

The report comes as new research from Lloyds Bank reveals the inconsistency of savings patterns in the UK, where the value of household savings – including deposits savings, pensions and shares – has ballooned by 452 per cent over the last 40 years, from £744bn (in today’s prices) in 1975 to an estimated £4.1 trillion today.

Over that time, the average value of deposits held per household has more than doubled from £21,070 to £48,906, and yet more than one in three (36 per cent) UK households have no savings (deposits and investments) at all. A further 13 per cent hold savings and investments of less than £1,500.

Setting out what it terms the “policy challenge”, StepChange makes seven recommendations to boost savings rates, including adapting the auto-enrolment pension system to include a workplace saving scheme which all employees would be signed up to unless they opted out.

It points out that such an approach has proved successful elsewhere, with participation rates in various schemes in the United States increasing by between 49 and 90+ per cent.

Another idea to increase saving rates is to introduce prize-linked saving (PLS) schemes, where account holders are regularly entered into a cash prize draw. Such schemes in the United States and Japan have been shown to be very successful, especially among low-income households.

Other recommendations include savings accounts tailored for irregular savers from low-income households, and the expansion into secondary schools of current trials of credit union accounts for primary pupils, linked to financial education.

StepChange: the recommendations

Government should:
1: aim for all UK families to have at least £1,000 in savings
2: add opt-out savings element to auto-enrolment pension system
3: build saving into the welfare system
4: expand current trials of credit union accounts for primary pupils, linked to financial education, into secondary schools.

Banks should:
5: pilot savings accounts for families that can only pay in small, irregular amounts
6: explore use of prize-linked savings accounts which appeal to lower-income consumers.

Also:
7: enhance the current proposal to include a savings element in the budgets of people receiving debt advice.