Re-thinking short- and long-term saving

25 April 2019

This article was featured in the May 2019 issue of the magazine.

 

Matthew Blakstad, assistant director of the NEST Insight unit reveals a pilot to address the issues to lead to better financial wellbeing

 Thanks to auto-enrolment, millions of people are now building up meaningful pension pots to help them save for a more comfortable later life. However, many of these people, particularly those on lower and moderate earnings, don’t have enough in liquid savings to deal with financial shocks, such as the car breaking down. When this happens, they may stop pension contributions, reduce spending on essentials or turn to pay day lenders or credit cards. 

 

Long-term versus short-term 

In general, long-term illiquid savings, such as a pension, and short-term liquid savings products have been offered to savers separately without a clear sense of how, or indeed if, they might interact. This means that people may have to trade-off their short- and long-term financial needs in a zero-sum game, which could have a negative impact on their financial wellbeing. 

In the UK, we now have over ten million people newly saving, or saving more, for their retirement thanks to auto-enrolment. By almost any measure, the initiative has so far been a huge success. By contrast, interventions to encourage greater levels of liquid saving have been less comprehensive and the results patchier, especially at lower incomes.

 

Financial stress 

  • Four in ten workers say money worries have made them feel stressed over the last year. 

  • A quarter say they have lost sleep over money worries. 

  • One in eight workers report that money worries have affected their ability to concentrate at work. 

  • One in twenty workers have missed work in the last year due to money worries (Reference 4).

 

In fact, 26% of working-age adults have no rainy-day savings, and only 44% have £500 or more on hand (see Reference 1). This leaves many people at risk of short-term financial shocks which can have a severe impact on their lives. High-cost and unpredictable one-off expenses, such as the breakdown of a household appliance, can cause financial hardship for people whose disposable income after essentials is low (Reference 2). In some cases, people may have to resort to high-cost sources of borrowing, which if not managed carefully could lead to debt spirals. Being stuck in debt can cause high levels of stress, which in turn can have a knock-on effect on health, productivity and earning capacity (Reference 3).

 

Addressing the issue

NEST Insight launched a research trial at the end of 2018, which is being rolled out to a number of UK employers. The pilot will explore whether the ‘sidecar savings model’ can improve workers’ financial resilience today and in retirement by helping them to build up some emergency savings whilst also saving more for the future. Rather than having a separate pension pot and emergency savings account, this hybrid approach combines the two. Doing so enables the flow of money to be managed in a smarter way that fits more naturally with people’s financial lives and preferences. The idea is that this approach will help to create a better balance of shorter- and longer-term savings for each individual saver.

The payroll mechanism enables a regular flow of contributions to be split between the two pots. This makes the savings tool really simple for employees to use. They just need to sign up and agree to pay an additional amount each month on top of their normal auto-enrolment contributions, such as £25 or £50. The rest is done for them. Their normal pension contributions will carry on going into their pension pot as usual, and the extra amount they’ve contributed will go into the emergency account. So, whilst they’re busy with work and home life, their emergency savings pot will be steadily building up so it’s there ready for them when they need it most. And, if they reach the emergency account’s savings cap, additional contributions will start flowing into their pension pot to help them save more for their retirement. 

 

Measuring the impact 

Over the next two years, NEST Insight will be following employees on their savings journey to measure:

  • how many sign up to use the savings tool

  • how much they save in the emergency account, and

  • the impact on their financial wellbeing. 

 

About NEST Insight 

NEST Insight is a collaborative research unit, set up to understand and address the challenges facing NEST members and other defined contribution savers. Visit www.nestinsight.org.uk to find out more. 

 

References

1. Money Advice Service: UK Financial Capability Strategy for working-age people (http://bit.ly/2UHeCZu); Department for Work and Pensions (http://bit.ly/2OYHmaK).

2. Money Advice Service (http://bit.ly/2UHeCZu); Packman, C. (2017) Savings for the future: solving the savings puzzle for low income households (http://bit.ly/2OWdAUc).

3. Money Advice Service (http://bit.ly/2UHeCZu); Chartered Institute of Personnel and Development (2017): Financial well-being: the employee view (http://bit.ly/2G8uoEL). 

4. Social Market Foundation (2016): Working well: how employers can improve the wellbeing and productivity of their workforce (http://bit.ly/2KwFyHN). 

 


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