WIREDGOV

• Read the report conclusions and recommendations
• Read the full report: Household finances: income, saving and debt

Key findings

Many households are over-indebted and lack a ‘rainy day’ savings buffer

• 'Uncompromising' local and central government debt collection should be reformed
• FCA should move forward with regulation to limit cost of high-cost credit, including overdraft fees, urgently
• ISA tax relief does little to incentivise saving for lower-income savers

Government must act now to tackle looming crisis from 12 million pension under-savers

• Self-employed should be brought into pension auto-enrolment
• Lifetime ISA should be abolished due to its perverse incentives and complexity
• Pension tax relief does not incentivise saving

Summary

• The FCA's cap on payday lenders has proven to be beneficial for consumers. Earlier this year, the FCA published the outcome of it’s high-cost credit review, which includes proposals on overdraft fees, rent-to-own, home-collected credit, and catalogue credit and store cards. The FCA should move forward with these proposals urgently.

Debt collection practices of public authorities 'worst in class'

• People become over-indebted not just through conventional credit, but through arrears on bills, including those owed to central and local government, such as council tax. Debt collection practices of public authorities have been described as ‘worst in class’; debts are often pursued over-zealously, uncompromisingly, and with routine recourse to bailiffs. This approach risks driving the most financially vulnerable people into further difficulty. The public sector should raise its standards to the level of industry best practice.

Direct matching schemes better at helping to build precautionary savings buffer

• The Government’s principal savings incentive takes the form of tax relief on interest, primarily through ISAs. Yet there is little evidence that tax relief is an effective way of encouraging potentially vulnerable households to save for a rainy day. There is, however, more evidence that cash bonuses and direct matching schemes, such as the Help to Save scheme, are better at helping people build a precautionary savings buffer. The Government should update Parliament on the usage of such schemes and its efforts to increase take-up. It should also consider widening the eligibility criteria.

Government must act now to tackle  looming crisis from pension under-savers

• Since the introduction of auto-enrolment, the number of pension under-savers was reduced by two million, but there are still 12 million people in the UK who are not saving enough for their retirement, according to the Government’s own research. The Government must act now to tackle the looming crisis from millions of pension under-savers.

Urgent need to bring the self-employed into the auto-enrolment system

• There is growing concern about the number of self-employed, including ‘gig economy’ workers, who are not covered by pension auto-enrolment. There is, therefore, an urgent need to bring the self-employed into the auto-enrolment system, but the Government has no clear strategy or timetable for doing so. The Government should consider making use of self-assessment and national insurance contributions to auto-enrol the self-employed.

Government should abolish the Lifetime ISA

• The Lifetime ISA has been strongly criticised for its complexity and its inconsistency with the other parts of the long-term savings landscape, which has contributed to its limited take-up by customers and providers. The Government should abolish the Lifetime ISA.

Tax relief on pension contributions is not effective way of incentivising saving

• The main financial incentive that the Government provides for long-term saving is tax relief on pension contributions. This is not an effective or well-targeted way of incentivising saving into pensions. The Government may want to consider fundamental reform. However, the existing state of affairs could be improved through further, incremental changes. The Government should consider replacing the lifetime allowance with a lower annual allowance, introducing a flat rate of relief, and promoting understanding of tax relief as a bonus or additional contribution.

Replacing triple-lock with earnings-uprating could increase the number of under-savers

• If the state pension triple lock is maintained in the long term, the state pension will rise relative to earnings indefinitely. This is clearly unsustainable. However, replacing it with earnings-uprating could increase the number of under-savers. The next auto-enrolment review should explore the options for making up with private savings the shortfall that could result if the triple lock were abandoned in the future.

Treasury should report on the state of household finances in next Budget

• It is the Treasury—and not the financial regulators—who bear overall responsibility for ensuring that low rates of saving or high rates of indebtedness do not imperil long-term economic stability or living standards. In the next Budget, the Treasury should report on the state of household finances, identify the key risks to the financial resilience of households, and set out its strategy for addressing them.

Chair's comments

Commenting on the Report, Rt Hon. Nicky Morgan MP, Chair of the Treasury Committee, said:

"Many households are facing challenges that are putting pressure on the health and sustainability of their finances. Over-indebtedness, lack of rainy day savings and insufficient pension savings are some of the weaknesses in the household balance sheet identified in this inquiry.

The Committee’s report makes a series of recommendations for the Government to consider that would help households ensure that their finances are as resilient as possible,

Whilst financial service regulators and guidance bodies have important roles to play, the Government should not pass the buck to them."