One million working-age adults on middle incomes (i.e. excluding
the richest and poorest fifths of the population) have less than
one month’s income saved in an accessible form and say that they
would not be able to meet an unexpected financial outlay of that
magnitude. They report not being able to use their (modest)
savings, borrow, or get help from family or friends to meet an
expense costing one month’s income. This implies large numbers
are at risk of financial difficulty in the event of a drop in
their income or an unanticipated expense.
Having low levels of savings is very common for low-income
people. On the eve of the pandemic, 70% of the lowest-income
tenth of the working-age population had less than £2,000 saved.
But even in the middle of the income distribution, 43% had less
than £2,000. So, for a significant minority of working-age
middle-income adults, a ‘rainy day’ event to their finances could
prove very challenging.
This is one of the key findings from new research published today
by IFS, funded by the IFS Retirement Savings Consortium and the
Economic and Social Research Council, which focuses on people
with low levels of savings and how problematic that can be.
Other key findings from the report include:
-
Those with low levels of financial literacy have lower
levels of savings. Even after accounting for income,
education, age, debt and other individual characteristics,
those who could not correctly answer relatively simple
questions about a bank statement, interest rates and inflation
were 8 percentage points more likely to have low savings (i.e.
less than £2,000) compared with those who could answer all
three correctly.
-
Having low levels of savings is very
persistent. 70% of those with low savings on the eve
of the pandemic had had low levels of savings for at least the
last four years. The lowest-income, least financially literate,
and least-educated groups, holding other factors constant, are
more likely to have persistently rather than temporarily low
savings levels.
-
Experiences during the COVID-19 pandemic highlight the
important role played by savings in protecting people from
financial difficulties. Looking at who became
unemployed, were furloughed, or lost all their self-employment
work at the start of the pandemic, those with no savings were 6
percentage points more likely to fall into arrears on household
bills in April 2020 than those who had one month’s income
saved.
-
The role played by savings is particularly important
for those with less support from the state.
Self-employed people received much less support at the very
start of the pandemic than furloughed employees. Not having any
savings was much worse for them. Among the self-employed who
lost all their work, those with no savings were 16 percentage
points more likely subsequently to fall behind on bills
compared with those with one month’s income saved.
Bee Boileau, a Research Economist at IFS and an author of
the report, said:
‘There are large numbers of middle-income working-age adults with
little or nothing set aside for a rainy day. Some might be able
to borrow on credit cards, or from friends or family, but a
million middle-income people would not be able to meet a
significant unexpected expense. With low levels of financial
literacy associated with having few savings, one avenue for
policy could be to work to boost financial literacy levels in the
population.’
Tom Wernham, a Research Economist at IFS and another
author of the report, said:
‘Experiences during the pandemic show how important it is for
people to have some savings. When bad financial shocks hit, those
with some savings were much less likely to fall into financial
difficulties than those with little or nothing set aside. This is
particularly important for those who do not have access to
financial support from family or friends, or for whom state
support is more limited.’
ENDS
Notes to Editor
‘Characteristics and consequences of families with low levels
of financial wealth’ is an IFS report by Bee Boileau,
Jonathan Cribb and Thomas Wernham.
