Evidence submitted by True Potential LLP (HHF0017)

Household finances: income, saving and debt

Submission from True Potential LLP

December 2017

About True Potential LLP

• True Potential is a group of companies with close to 20 per cent of the financial adviser market using our services. These include investment management, financial advisory and business support services as well as financial services technology.

• True Potential began a study into the UK Savings Gap in 2013. To date, our quarterly research has amassed responses from over 32,000 people, producing a wealth of data into UK household budgets and personal finance trends.

• In 2013, True Potential pledged £1.4m to establish the True Potential Centre for the Public Understanding of Finance (PUFin) at the Open University Business School. The Centre conducts authoritative academic research into personal finance and provides a range of online financial education courses for the public. So far, over 350,000 people have taken part in the courses that range from basic household budgeting through to investing.

• True Potential is a pensions provider, working in partnership with some of the world’s best-known fund managers, including UBS, Allianz, Goldman Sachs, Schroders, Columbia Threadneedle, Close Brothers, SEI and 7IM.

• The Group’s investment firm, True Potential Investments (TPI), is an FCA-regulated platform operator, investment manager, and pension operator and administrator.

• True Potential is a provider of Automatic Enrolment services to thousands of UK businesses and employees.

• True Potential also owns impulseSave®, a first-of-its kind top-up financial technology (fintech) for investments as well as True Potential Investor – a direct-to-consumer investment platform

• True Potential LLP was ranked as the fastest growing financial advice and technology services company headquartered outside London in the 2014, 2015 and 2016 Deloitte Technology Fast 50. The ranking of the 50 fastest-growing technology companies in the UK is based on percentage revenue growth over the last five years.

Executive Summary

S1. The statistics quoted in our responses below are taken from True Potential’s Savings Gap research, which comprises a nationally representative quarterly survey of 2,000 people, carried out by an independent research company.

S2. To date we have polled 32,000 people.

S3. Our latest study reveals the careful balance many savers must achieve in securing long-term financial stability, while making ends meet in the immediate term.

S4. The data also identifies the many conflicting forces which detract from retirement fund saving. They include mounting debt, parental pressures and rising rental costs.

S5. Overall the survey shows a general increase in the number of people addressing their long-term financial needs.

S6. The level of disengagement from pension saving has dropped since our previous study in Q3 2017.

S7. Savers put an average of £287 (minus employer contributions) into pensions in the period, compared to £203 in the previous quarter. Only 36 per cent of respondents added nothing – a quarter-on-quarter drop of nine per cent.

S8. Encouragingly, this figure falls to a low of 28 per cent among 25 to 34-year-olds, suggesting millennials are taking their pension responsibilities seriously.

S9. The over-55s contributed the highest average amount to their pension pots, perhaps in a late push to change the course of their retirement. Our data shows many people nearing the end of their working life are lowering their expectations, as they awaken to the mismatch between their retirement dreams and the real picture of what they can afford.

S10. But there is clearly a growing appetite for retirement fund saving in all age groups, driven in part by the success of auto-enrolment.

S11. Other savings pots excluding pensions were also well fed in Q3 2017. Three quarters of respondents added at least something to their general savings, with an overall average of £624 saved during the three months.

S12. The persistent menace of debt continues to slow down long-term saving, however, although at a reduced rate compared to our last study.

S13. An average of £299 of debt was accumulated per month by respondents, compared to £370 in the previous quarter. Worryingly, we see a significant proportion of people close to retirement going into the red; potentially offsetting some of the funds they have put aside for later life.

S14. Our data also provides a detailed picture of the many other financial forces which counteract savings activity.

S15. Trends highlighted include the sheer dominance of rent and mortgage repayment costs on monthly budgets. The cost of running a car, often through financing and leasing deals, is also increasingly impinging on funds that could otherwise be saved.

S16. Despite all of these challenges, the proportion of people saving for retirement is rising. Through ongoing financial education, legislative reforms and the emergence of increasingly convenient and easy to understand savings products, we hope this trend will continue throughout 2018.

Overall savings levels and balance sheets

1. To what extent does the UK have a “savings gap”?

1.1. People save money for a variety of short, medium and long-term reasons. At True Potential, we are especially concerned with retirement savings. This is where we see the greatest need for savings and the greatest shortfall in current provision.

1.2. Only a minority of UK savers will have enough funds for a comfortable retirement, by their own definition. Our analysis shows that, on average, consumers believe an income of £23,000 is needed annually in retirement to live comfortably. Based on actual savings behaviour however, people in the UK are on course to receive an income closer to £6,000 per year from their retirement fund.

1.3. This is what we define as the Savings Gap, but there are wider manifestations of it.

1.4. Almost a third of UK households have enough savings to last just 10 days should they be hit by redundancy or job loss, our figures show.

1.5. Meanwhile 29 per cent of UK households have just £500 or less of easily accessible savings. Fifteen per cent have no savings.

1.6. The average UK household’s monthly expenditure is £1,437, putting close to a third of households less than 10 days from bankruptcy should they lose their income.

1.7. At the same time, however, 72 per cent of respondents believe six month’s worth of salary in savings is required as a ‘rainy day’ fund to cover unexpected bills or expenses.

1.8. Based on the average UK salary of £26,500, that means savers would need a £13,000 pot to take the pressure off. Nationally, the average saver has around a third of this (£4,797) in easy access savings.

2. How do household balance sheets vary across generations?

2.1. The financial wellbeing of UK households is a reflection of the health of the national economy.

2.2. Through detailed analysis involving 2,000 consumers’ income, expenditure and financial behaviour in Q1 2017, we have attempted to pinpoint bright spots, outline emerging or escalating problems and signpost challenges.

2.3. By interrogating data with a wide range of indices, the True Potential UK Household Finance Index provides robust insight into the financial decisions, habits and pressures playing out behind closed doors.

2.4. Householders at the mid-point of their working life have taken by far the biggest reduction in wages. The most common reasons for this, as cited by 35 to 44-year-olds, is a change in role (36 per cent), followed by a career change (19 per cent) and becoming a parent (10 per cent). Workers in the 25 to 34 category have seen the sharpest wage rise.

Figure 1

Age related debt analysis Q1 2017

Figure 2

Age related savings analysis Q1 2017

Figure 3

Household income

2.5. Respondents were asked how their household income had changed since 2014. Overall it has remained relatively flat, with an average annual drop of £37, a £122 rise for men and a £189 decrease for women. Notable differences can be seen when analysed by employment status, region, age group and household make-up, however.

2.6. The only workers to experience a rise – albeit by a modest £140 – were those in full-time employment, working a single job. Individuals involved in the so-called ‘gig economy’ (freelance or short-contract work) fared less well.

Figure 4

2.7. With a £677 variable between the best and worst performing regions, wages have been relatively static across the country in the last three years. The East of England experienced the highest rise, at £253, with workers in Scotland suffering an average drop of £495.

Figure 5

2.8. Carers and single parents have taken the biggest hit in income since 2014. Parent couples with grown up children living at home have seen their income increase more than adults with no dependents – perhaps indicative of sons and daughters staying at home for longer and therefore contributing more to the family pot. 

Figure 6

2.9. The average household overall took on £560 of debt in the quarter. Our study also found that £1797 is the average debt threshold -  the amount of debt people are in before they become concerned about it. Single parents are statistically the most exposed to debt, while men appear more willing to get into debt than women. ‘Just to get by’ was the most common reason debt was acquired.

Figure 7

By employment status of sole or main earner

Figure 8

By region

Figure 9

Ability to save for the future

2.10. The successful launch and ongoing expansion of auto-enrolled pensions is helping to encourage workers to save for their future. Yet the UK remains in the throes of a savings crisis, with many people’s savings habits on track to leave them short of funds in retirement. their retirement fund.

2.11. Households are also advised to save for the shorter term, building a financial buffer to protect against unwelcome surprises like redundancy or illness. Our study measures the many factors that influence UK households’ ability to prepare for their short and long-term financial future.

2.12. On average, UK households put £355 into pension pots per quarter, while setting aside £427 into general savings and investments. At the same time, households dipped into their savings an average of just over once a month to make ends meet.

Figure 10

Figure 11

Household lifetime saving and financial planning

3. What policies could support households in achieving appropriate levels of saving in cash and pensions? Are current policy interventions (e.g. ISAs) well targeted?

3.1. The most successful savings policy that we have seen in recent years, is automatic enrolment (AE). There are now approaching 10 million people who are saving into a pension and making a provision for their retirement. Many of those who have been auto-enrolled, would not otherwise be saving towards their retirement.

3.2. AE is a policy that we fully support and we believe that the proposal to extend it to younger employees is sensible. Consideration must be given to the amounts employees are contributing and whether this will be sufficient.

3.3. There is universal recognition that the current 1% employee contribution is merely a starting point and within 18 months employees will be contributing 5%. Many accept that this is still unlikely to be sufficient to provide a comfortable income in retirement but there is no consensus about what to do next. Indeed the debate is focussed on the level of AE opt outs and whether the increase to 5% employee contributions will increase the opt out rate, currently standing at around 9%.

3.4. True Potential’s view is that employees need an income in retirement of around two-thirds of their salary to enjoy the same standard of living. Achieving this will require AE contributions of up to 16%. The challenge is how to achieve that without causing opt our rates to soar.

3.5. Our suggestion is Auto-ISA. We are firm believers that ISAs represent the best chance of closing the savings gap. They are simple and popular. There has been a steady upward trend in the number of ISAs opened and annual subscriptions for several years. Pensions’ popularity has been in decline for some time – a trend only reversed by automatic enrolment. We supported the increase in the annual ISA limit to £20,000 and would like to see this rise again to £25,000. True Potential put forward proposals in January 2016 for a Retirement ISA, acting either as an alternative to a pension or as a complementary product. We remain generally supportive of the Lifetime ISA, although we are concerned that it has become overly complicated. One of the most important qualities of ISAs is their simplicity, leading to their popularity.

3.6. One of the main challenges with pensions is the lack of flexible access under age 55. If there is an increase in AE opt outs over the next 18 months, it is likely to be due to people not wanting to commit a larger portion of their salary that they cannot access until decades later.

3.7. We do not propose to amend current AE proposals that will see combined employer and employee contributions reach 8% in 2019. We do, however, propose extending AE from 8% up to 16% through the 2020s but into an ISA, not a pension.

3.8. This will mean that more people will be saving more of their salaries but with the flexibility to withdraw from the ISA element if they wish. We believe inertia will prevent many from withdrawing early but the flexibility to do so if they wish, may deter opt outs.

Figure 12

3.9. This is a policy proposals that True Potential is currently testing and researching with consumers. We intend to come forward with more details and results from our research in Q1 2018.

4. What actions can government take to improve levels of financial awareness and education, and what lessons can be learned in designing the successor to the Money Advice Service?

4.1. Financial education became a mandatory part of the secondary school curriculum from September 2014. Most of today’s teenagers will, therefore, have started off with a better grounding in this area than young people in their 20s and 30s.

4.2. Yet certain financial fears which weigh on millennials – like never getting on the property ladder and being less affluent than their parents - seem to have permeated to ‘Generation Z’. 

4.3. While 65 per cent of 16 to 18-year-olds believe a mortgage deposit will be beyond their means, 15 per cent say they are stressed about money.

4.4. In today’s fast-moving world, financial products are increasingly an essential part of life but they are often wrapped up in complicated jargon that few people understand. Expanding compulsory financial education in classrooms would be an extremely useful policy intervention that the Government could explore.

4.5. The move to a single financial guidance model is a sensible step. However, True Potential’s view is that free guidance is not always adequate. In fact, we believe that often what most people want and need, is advice, not guidance so we remain unconvinced about the impact that free guidance services really make.

4.6. But the cost of professional advice nowadays means many are effectively excluded. Furthermore, regulations introduced in the 2013 Retail Distribution Review (RDR), mean that financial advisers now spend a greater proportion of their time servicing existing, wealthier clients and being remunerated accordingly, versus actively finding new clients. True Potential represents 20% of UK financial advisers, who are an asset to the UK but are far fewer in number today. We believe the 2016 Financial Advice Market Review did not fully address the reasons behind falling numbers of financial advisers nor the consequences of RDR on the accessibility of financial advice to all. This is something we urge the Government to look at again.

5. Are retiring households receiving adequate and appropriate financial advice following the implementation of pension freedoms?

5.1. True Potential’s research shows that the overall take-up of Pension Freedoms has been relatively small so far. Since access was granted, just 10% of eligible savers have made withdrawals from their pension fund according to our data. In total, a third of respondents have withdrawn to reinvest, while a quarter has paid off debts and a fifth has used pension withdrawals as income.

5.2. For some savers wishing to access their pension, it will be necessary to transfer to a new provider. Under existing rules, advisers must carry out a large amount of costly evidence gathering to prove their client will not be worse off after being transferred.

5.3. A simple solution would be to cap the annual charges on income drawdown pensions. That would reduce the volume of advice required and therefore the cost, opening up these freedoms to more people.

5.4. True Potential has proposed that the Government introduces an annual charge cap of 0.75% on income drawdown pensions. The same cap has already been successfully implemented for workplace pensions.

5.5. We do believe those approaching retirement should be encouraged to take financial advice. With a range of new options and many defined benefit pensions schemes showing signs of difficulty, we are alarmed that just 44% of those aged 55 and over have taken financial advice, according to our data. Industry and government must work harder and more closely to encourage more people to seek financial advice.

Household indebtedness and consumer credit and incomes

6. Is the overall level of UK household debt and consumer credit sustainable?

6.1. A third of UK households are blighted by daily money worries, with women, single parents and carers among the worst affected.

6.2. Our study found that 33 per cent of UK consumers worry about their finances at least once a day.  Women are seemingly more susceptible to money worries than men, with 39 per cent worrying about their finances every day, compared to 26 per cent of men.

6.3. In terms of employment status, the most frequent money worriers are surprisingly those that work full-time with an additional sideline way of generating income, such as selling online.

6.4. Almost 45 per cent of this group said they worried about money every day, compared to 36 per cent of part-time workers, 34 per cent of the self-employed and 31 per cent of full-time employees who work a single job.

6.5. The financial burden of raising young children as a single parent is a major contributor to money concerns, the survey suggests.

6.6. Some 41 per cent of single parents with dependents under 18 said they worried on a daily basis about their finances, in contrast to couples with no children (28 per cent), couples with grown up children living at home (27 per cent) and single adults with no dependents (35 per cent). A large minority (40 per cent) of respondents living with elderly parents requiring care also admitted to daily money concerns.

6.7. Overall, consumers worried about money an average of 3.17 times per week with 54 per cent of people worrying at least once a week. Under 30 per cent of respondents had money worries on a monthly basis or less frequently. 

6.8. The over 55s had the highest proportion of people who claim to never worry about money, at 22.5 per cent, compared to the low of 5.5 per cent among people aged 18 to 24.

6.9. The vast majority of money worries were identified as being related to debt. Respondents took on an average of £1110 of debt in the last quarter.

7. What is the scale of and trend in problematic debt and over-indebted households?

7.1. Through our Saving Gap study, we have tracked personal debt levels for five years. The data below is the most up to date, from Q3 2017. 

Figure 13

Approximately, how much new debt have you taken on in the past three months, including traditional loans, credit cards, store cards and payday loans?

Figure 14

Approximately, how much have you managed to put towards your general savings in the past three months, not including pensions?

Figure 15

Approximately, how much have you managed to put towards your pension pot (s) in the past three months, not including any employer contributions?

Figure 16

Approximately, how much have you managed to put towards your pension pot(s) in the past three months, not including any employer contributions?

7.2. More men than women paid into their pension during the quarter. Fewer women also made a contribution to their general savings in the period.   

Figure 17

Approximately, how much have you managed to put towards your general savings in the past three months, not including pensions?

Figure 18

Approximately, how much new debt have you taken on in the past three months, including traditional loans, credit cards, store cards and payday loans?

UK household expenditure

7.3. Our data on UK household spending highlights the many pressures savers face each month on top of their responsibility to set funds aside for the future.  The figures below show the mean average proportion of monthly income spent on each expense, plotted against age categories. Unsurprisingly accommodation costs dominate monthly budgets, while both debt repayments and car costs each make up around a fifth of outgoings.

Figure 19

8. Have household incomes become more variable as a result of more flexible labour markets and the “gig economy”, and does this raise the need for new credit products? Income up/down

8.1. Workers in the so called ‘gig economy’ are more reliant on debt and saving less for the future than full-time employees, according to our data.

8.2. Growth in the gig economy – the labour market with a prevalence of freelance and short-term contracts – helped the number of self-employed people in the UK to soar by 148,000 last year to 4.8 million.

8.3. Gig workers enjoy flexible hours, for firms such as Uber and Amazon, but some argue that they enable companies to shirk employee responsibilities.

8.4. Workers may be under the same level of control from their main or only client as full-time staff, yet usually receive no employee benefits such as sick pay or pensions.

8.5. They are also likely to be financially disadvantaged, according to our findings. Full time employees with a single job invested an average of £415 into their pension in the first quarter of 2017, the survey shows.

8.6. This compares to £300 for self-employed people with several ways of making money and £367 for self-employed people in a single role. Full time workers with a side-gig, such as selling online, saved even less at £279.

8.7. In terms of general savings, full-time workers set aside £479 in the period, against £467 for the self-employed working one trade, £314 for those with multiple roles and £247 for full-timers dabbling in the gig economy.

8.8. Although full-time workers took on more debt in the period (see below), their gig-working counterparts were more likely to use debt just to get by.

Figure 20

8.9. Less than half (49 per cent) of the full-time employees questioned took on the debt ‘just to get by’, compared to 62 per cent of the self-employed in a single role and 64 per cent of full-time workers with a side-line. Among self-employed people with multiple income streams, this figure fell to 51 per cent.

8.10. Our survey also shows that the average full-time employee in one role has seen their income increase by £140 in the last three years – while every other category experienced a loss (as shown below).

Figure 21

Ability to save for the future: Q2 2017

Figure 22. By employment status of sole or main earner

December 2017