Rainy day savings via automatic enrolment
21 July 2017
Helping people to build a £1,000 rainy day savings fund via the pensions automatic enrolment framework would prevent debt problems and have a minimal impact on retirement incomes.
According to new analysis conducted by the Pensions Policy Institute (PPI) for StepChange Debt Charity building a rainy day savings fund would also be better financially for people than if they stopped paying into their pensions to cover emergency costs.
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 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.
How would APS work?
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. For further details see notes to editors.
The impact of APS
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.
Pensions Expert has reported that the research arm of mastertrust Nest is planning to trial a new savings product in 2018, which will split contributions between a pension pot and a “rainy day” fund, in an effort to improve short-term financial health.
The trial product would split pension contributions between a standard Nest pension pot, and an external bank account or liquid fund for emergency spending. Once the level of emergency savings reaches a satisfactory threshold, all contributions would likely be diverted to the pension pot.
Nest Insight, the team behind the proposal, is currently working in partnership with the Money Advice Service to analyse the needs of savers in lower income brackets.
The trial product, scheduled to be tested between 2018 and 2020, is being developed alongside researchers at Harvard University, and other pension providers can join in. The team’s research will be made publicly available.