ONS figures show there should be cause for optimism around household finances. Wage rises in the three months to September 2018 showed the biggest annual increase (3.2%) since the global financial crisis of 2008 and unemployment (4.1%) is at its lowest rate since the mid 70s.
It should mean that the country’s household finances are in a good state. However, while that is partially true, it does not tell the whole story. We are saving, on average, less than half as much of our household income as we have done in the past, and half the population is deemed financially vulnerable were they to be made redundant or fall ill.
The question arises, then: what are Britons doing with their hard-earned cash and could they do better?
Current accounts
As the modern world moves away from cash, it is difficult to live without a current account – hence there are some 70m in use in the UK at the moment – and it is fair to say that when Brits pick a bank, they normally stick with it.
A Competition and Markets Authority investigation in 2016 found that only 10% of us had switched banks in the past five years, even though a new system ensures it is a simple procedure with direct debits being moved over seamlessly. It means the big four high street banks’ share (of more than 70%) of the current account market has barely changed in more than a decade.
Source: CMA 2016
Pensions
There has been a massive increase in pension penetration since the government brought in automatic enrolment for employees in 2012. The new law mandates that all workers aged 22 or over who are paid £10,000 or more per year must be given the chance to enrol on a pension scheme through their job.
Source: ONS
Household savings
The proportion of household income that is saved has gone down in the past couple of years. Historically, over the past 60 years, an average of about 8.9% of money coming into a household was saved, but ONS figures now show that in the final quarter of 2018, savings rates had dipped to less than half that historic average.
Source: ONS
Savings by age group
Many UK adults have very little in the way of cash savings. One in eight (13%) UK adults have no cash savings whatsoever. Each age group saves increasingly more as they grow older. One fifth (20%) of 18‐24 year olds have no cash savings compared with just 5% of those aged 65 and over.
Young people and their money
One potential area of concern is that young people (18-24) are least confident in managing money and least knowledgeable about financial matters. Overall, the proportion of this age group who are in debt (excluding student loans) is 32%, and the average debt for those who are in the red (excluding student loans) is £1,460.
By the time people are 25‐34-years-old, they’ve gained experience with financial products, making them more confident when it comes to managing their money; 33% say they feel highly confident managing their money, compared with a similar proportion (37%) of all UK adults. In contrast, just 21% of 18-24-year-olds feel highly confident.
Isas
It seems there is nothing that encourages Brits to save as much as a tax-free offer. Isas have been very popular since they were launched back in the 90s to encourage people to save a set amount each year and then pay no tax on the interest. The current tax-free level stands at £20,000 per year for adult Isas and £4,260 for junior Isas.
Although there was a slight dip in the number that were taken out in the most recent financial year, the total saved has gone up, as the annual allowance has incrementally increased.
Source: National Statistics
FSCS awareness
The Financial Services Compensation Scheme was set up by the government to help UK adults out when a financial provider fails. It compensates against poor financial advice leading to financial loss, and protects people’s insurance, savings, pensions and investments. A survey of 941 adults who owned at least one financial product found that 76% either thought they would be financially compensated or had heard of FSCS.
Source: FSCS
Whilst awareness is good around FSCS protection of current and savings accounts, it is low around the other product areas that are covered.
Source: FSCS/Ipsos Mori
There is a split in those who have the know-how to make informed decisions and those who don’t. While 14% of UK adults report having a good knowledge of finance and money management, and 37% would like to understand more about financial products, 4 in 10 UK adults report that they are not that interested in finding out more about financial products (17%), that knowing more would make little difference to their financial situation (17%), and that they don’t have the time or ability to actively find out more about financial products (5%). Many of these people could be exposed to risky financial products, such as peer-to-peer lending or Christmas saving clubs, unaware that the FSCS does not protect these.
Source: UM Insight; Ipsos Mori
Financial vulnerability
This lack of engagement with financial services also leads to people making financial decisions, such as drawing down on their pensions, without ensuring they get robust advice, or being unaware when their insurance company goes bust, potentially leaving people without car, contents, or buildings insurance. These people are often also described as being “financially vulnerable”, meaning they’d have difficulty in accessing funds if their car needed work, or the boiler needed to be replaced. This could leave them racking up debts that they’d struggle to repay.
Source: FSCS/UM Insight
Almost one in six Brits (17%) have “low financial capability” – that is they are not confident in managing money and struggle to understand financial terms and news – with young Brits, in particular, not making themselves financially resilient.
Conclusion
The evidence suggests there is real reason to be concerned over the UK’s financial resilience. People need to borrow to finance large purchases and fulfil the dream of getting on the housing ladder, yet households are saving less than before for a proverbial rainy day. Young people, in particular, appear to be losing the saving habit. This lack of financial resilience to withstand a major life event means picking a trusted, reliable financial services provider that is authorised is more essential than ever.
For more information about how FSCS protects your money, visit www.fscs.org.uk
