If the poor can’t save in this pandemic, when can they save?

 

Michael Johnson

Yesterday I wrote about Nest Insight’s sidecar savings project (now mysteriously called “Jars”).  The article caught the eye of Michael Johnson who graphically  reminded me of the most effective means ever of increasing the savings ratio.

So – covering my lifetime, we have never seen people spend so little and save so much. Michael, the economist that he is , sees this as “over-saving” and continued

OK, not the ideal policy, but how about some flexibility in pension pots…..limited, penalty-free access for what most people care most about  (e.g. home ownership for millennials) ?

Knowing that you don’t have to wait until at least 57 to get any access surely encourages people to save in the first place and keep their options open…..and grab an up-front incentive too.  Hang on a minute, we already have that available. It’s called a Lifetime ISA.

Which makes a lot of sense. In today’s world of workplace savings, most people are going to take active decisions about regular savings either using payroll (where the money is being spent on retirement) or through banking payments (in which case the ISA is the most obvious product and the Lifetime ISA , the most obvious variant.

The question for Nest Insight is whether people will change behavior and start saving in Jars  as a third way and I’m struggling to see why they might.


OECD: Covid-19 will not help close advice gap

Michael Klimes’ headline reports on an OECD research document . Jennifer Mosher of the OECD tells Klimes

“Not many people were paying for advice before Covid-19 and I do not see how it will make more people want to pay for financial advice. They simply are not going to pay more.

“The Pension Wise initiative is quite good but getting people to pay for advice is difficult as it is very hard to value what advice is worth. I don’t have an answer to getting more people to pay for advice and being happy to do it.”

This begs the question “what are advisers supposed to do?”, when advising people about savings and the obvious answer is “encourage them to save more”. This was the adviser’s job till the onset of auto-enrolment and the advent of the RDR when the saving issue (at least for the market) got solved overnight freeing up IFAs to move on to be financial planners to the aspirant and wealth managers to the affluent.

Advisers no longer see their job as encouraging people to save nor are they rewarded for doing so. The choices available to savers are increasingly being taken online and determined by media stars such as Martin Lewis and key journalists in the national press.

The advice gap for most people is filled by online information (call it guidance or advice). Pension Wise is an additional resource, the core choices will be taken through employer portals and online. I am not convinced that most employees want to organize their private savings publicly. The line between ISAs and Pensions is primarily determined by distribution.


But will COVID-19 help low-earners to save?

Again Johnson is helpful in his comments (this time on linked in)

I think we need more detailed data before being sure of a closing savings gap. My hunch, and it is only that, is that those who don’t ordinarily save anything are still not saving anything because all their income goes on essentials (food, rent and utilities)?

The savings ratio tells us nothing about the distribution of savings by, for example, household income decile. A very useful research project beckons? First question: what do we mean by “savings gap”? Is it the national picture, i.e. an aggregation of 30+ million households’ data, or is it a specific reference to those individual households who don’t have any / insufficient savings?


The baggage of poverty needs more than a sidecar

It is clear that those with money have had had trouble spending it in the pandemic. A friend of mine spoke despairingly to me over lunch about how hard it has been to trade up his £27k Ducati to a £35k Ducati (apparently the Ducati showrooms are empty).

Meanwhile, many at the bottom of the income ladder ponder the end of the furlough and study the complex rules surrounding universal credit. Tax planning means little if you don’t pay tax but Government savings incentives exist for all workplace savers (unless yo are in a net-pay scheme). The self-employed can pick up basic rate tax incentives by investing in Nest, but this facility is not publicized.

It strikes me that low-earners, especially self-employed low-earners, have got better things to do than manage their savings in this sidecar. But like Michael, I don’t know whether the issues for the people the sidecar is designed for, are about capacity to save or privacy. The capacity of the workplace to organise retirement savings is proven, its capacity to help people manage short-term savings less so.

Auto-enrolling low-earners into the sidecar, might seem a good idea for policy makers looking for evidence that auto-enrolment rates into pensions can rise, but can we really use insights from employers as proof that the concept works?

The key is to work out (as Michael points out) whether this amazing spike in UK savings through the pandemic is shared by all sectors of the population or whether it excludes the poorest. The answer will probably determine the future of the sidecar and Jars.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in actuaries, advice gap, age wage and tagged , , , , , . Bookmark the permalink.

3 Responses to If the poor can’t save in this pandemic, when can they save?

  1. Brian G says:

    You cannot save what you do not have. If poorer members of society have less money than they need to pay for essentials, then they have a negative capacity to save, and of course a positive tendency to build up debt. Sidecar savings are not well designed anyway, but even if they were, you cannot save what you do not have (disposable income). Millions of people are poor, not tens of thousands, not hundreds of thousands but millions of people. We can have some really interesting debates about how those who spend money on non-essential goods and services might be encouraged and educated to spend less now and save more for later. But this debate is not relevant to the MILLIONS of poor people who are not even breaking even. Benefits are inadequate, and for many people who are actually illiterate, or just not very well educated, the benefits system is not welcoming and is very difficult to navigate. We live in a deeply deeply unequal society in terms of wealth and opportunity to secure well paid jobs.

  2. Martin T says:

    Many years ago when I ran a payroll team one of the staff came to complain that he hadn’t had his annual lump sum payment in his May pay packet. I was puzzled because there was no such scheme or bonus.

    After much discussion along the lines of “But every May I get a couple of hundred quid!” “I have no idea why, we don’t have any bonus or savings scheme that would do that!” I eventually twigged that it was a pay increase backdated to the previous January as the pay negotiations with the Union lasted well into the year concerned. However, in the year before his complaint we agreed a two-year settlement so there was no backdated pay due. A further long-ish discussion concluded with…

    “Well what am I meant to do now? That payment funds our family holiday!”

  3. Richard Taylor says:

    The first problem I have is that I’m not convinced the savings ratio is a very good measure of anything. It is the difference between two very large numbers which are often revised substantially. So it can fluctuate over time as new revisions of household income and expenditure change. Moreover, as borrowing increases, the savings ratio tends to fall – so a large increase in borrowing for house purchase, say, can result in a reduction in the savings ratio. Maybe the spike reflects something in the housing market over the period?

    My second problem, perhaps mirroring Brian G, is that the median income in the UK is £24,000. Therefore, with half the population earning £24,000 or less, saving for that group is clearly going to be a challenge. And even if they could save as much as 10% of their income (how many people with incomes above that do that?) who is going to provide advice on what to do with the saving?

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