Nest Insight has published a discussion paper outlining how many people don’t have enough liquid savings to manage financially on a daily basis
According to Nest Insight’s discussion paper, Liquidity and sidecar savings, more than one in four (26%) working adults have no rainy-day savings and only 42% have access to £500 or more. This means that lots of people are at risk of short-term financial shocks which could have a negative impact on their lives.
For those whose disposable income after essentials is low, high cost and unexpected one-off expenses such as the breakdown of a car, can cause acute short-term financial hardship, which could take months to fully recover from. These financial shocks could also lead to debt spirals.
The study found that in the absence of liquid savings, people were forced to rely on borrowing through credit cards, personal loans, from family or friends or in the worst-case scenario ‘payday’ loans. These methods are at best inefficient as they result in people simultaneously servicing a high-cost debt while also incurring relatively lower returns on any savings that do exist.
This has led to suggestions that the defined contribution (DC) retirement system should be opened up along similar lines to the US 401k system. This would be achieved through hardship withdrawals or a loan facility. In the US 401k plans are far more flexible in that they allow people to ‘borrow’ from their retirement savings and pay them back at a later date. The consequence of this system is that there has been a considerable amount of leakage from the US DC system. Some estimates suggest that as much as 40c in every $1 saved leaks from the system pre-retirement.
Will Sandbrook, executive director of NEST Insight contests this, stating: “With so many people now saving into a pension, some have suggested that the defined contribution (DC) system should be opened up to some level of early access. The idea being that if an individual has access to enough liquid savings they’re more likely to avoid damaging financial shocks, and the benefits of this could be felt right through into later life.”
“However, simplistic early access models have a number of design issues and create the risk that an excessive amount of money could be withdrawn from pension pots pre-retirement.”
“An alternative option could be to create a hybrid solution, like the sidecar model, which feels like a single product to the consumer yet has separate savings jars below the surface. This method would allow the pension pot to remain locked up, and invested for the long term, while giving savers access to an amount of liquid savings via a sidecar account.”
“There are many possible benefits to this approach. The model has the potential to improve the financial wellbeing of many NEST members, and other DC savers, who are on lower and moderate incomes.”
The study also found that financial worries have an effect on employees performance at work with a quarter (25%) stating that they have lost sleep over money worries which has led to one in eight workers reporting that this has affected their ability to concentrate at work. Worryingly one in twenty workers admitted they had missed work in the last year due to financial worries.
Jonathan Watts-Lay, director, WEALTH at work, a leading provider of financial education, guidance and advice in the workplace comments; “I believe employers need to help their employees understand the importance of saving, whether this is for the short term for items such as a car or holiday, the medium term such as a first house purchase, or the long term such as retirement.”
“Different savings vehicles are clearly needed for different purposes, so whilst pensions are critical to long-term saving, they are not helpful for short or medium term saving. The failure to engage with younger employees is often because pensions are seen as the most important type of saving, yet for many buying a property or paying for a wedding may be seen as the priority.
“A relevant and well communicated benefits package, which allows employees to understand the savings vehicles available to them, how they work and the benefit they bring, is not only useful to individuals but is also beneficial to employers in helping them to recruit the most talented individuals, whilst retaining a happy and committed workforce.”
“The best way of supporting employees with their lifetime savings is through the provision of financial education, guidance and advice in the workplace.”
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