Saving on a low income: are the barriers too big?

19th Jan 2016

We know that saving on a low income is a challenge. Recent government policies designed to give people more economic security in retirement are welcome - but more needs to be done to help those on a low income save for later life, says Claire Turner.

Pensions have been in the headlines again this week – with a mix of good and bad news. In his Life Chances speech last week David Cameron announced a ‘help to save’ scheme to encourage those on low incomes to build up rainy day savings. This is a great addition to the raft of policy measures designed to help people save more for retirement. Having buffer savings is important, and previous JRF research highlights the link between savings and a good retirement. Yesterday, #WASPI (Women Against State Pension Inequality) campaigners highlighted the significant challenges for women born in the 1950s who have had their State Pension Age increased at short notice.

When it comes to designing pensions and savings policy, it’s important to understand the real and practical barriers to saving faced by those on low incomes, regardless of age or gender. This isn’t just about changing attitudes. New research from the Joseph Rowntree Foundation, the Social Market Foundation and Ipsos MORI shows that, across people of different life stages and generations, struggles with the day-to-day cost of living mean that, for many, saving for the future feels out of reach. Young people cite debts and high rent; for those in mid-life it’s the cost of raising a family. For baby boomers, it’s the cost of household bills and the financial help they are giving to younger relatives.

Some of these challenges require action beyond savings policy. The markets play a critical role in the cost of living – action by business, regulators and the Government to make sure they work for all consumers could drive down the cost of household bills for those on the lowest incomes. Increasing the supply of new, affordable homes to rent or buy would also help bring down living costs for low income workers.

When it comes to specific action to enable people to save more for retirement, the research found public support for a range of potential policies which could enable those on a low income make small amounts of money go further. Auto-escalation, where employees pay a greater proportion of their earnings into their pension if they get a pay rise, for example increasing their contributions to up to 15% of their salary, was supported by three in five people.

Half (47%) of people supported changing the tax relief system so that lower-earning workers receive a greater contribution from the Government and those on higher salaries get a more modest one. One quarter (25%) of people opposed this.

Savings and pensions policy is at a crucial transition. It is important not to over-burden reforms such as automatic enrolment and changes to the state pension. However, understanding the particular challenges for people on low incomes and targeting policies is an important next step. The current and previous Governments have done excellent work to reduce pensioner poverty. To help ensure the economic security of the pensioners of the future, the markets must work together with business and the Government to reduce essential living costs.