Written evidence submitted by Citizens Advice (HHF0039)

About Citizens Advice

Citizens Advice is a national charity which delivers advice services from over 2,700 community locations in England and Wales through 292 independent local charities. We helped more than 350,000 people deal with 1.5 million debt issues last year. We helped 100,000 people with their pensions last year, including delivering 38,000 Pension Wise sessions and there were 6.5 million visits to the money advice pages on our website.

We provide holistic support for the wider challenges in people’s lives. More than half of the people we helped with their debts last year needed support with at least 1 non debt issue such as welfare, housing, or employment.

Executive summary

• Aggregate measures of household finances tell a limited picture of the changes affecting individual households. While there are clear problems at the aggregate level - principally the falling value of earnings - to understand the challenges faced by households we have to look at the changes at the household level and at how wider changes are distributed between households.

• This response is based on Citizens Advice administrative data and a number of wider sources; Analysis of longitudinal data from the Understanding Society survey; Analysis of the Living Costs and Food Survey; 10 depth interviews with people with volatile household finances; A representative poll of UK adults.

• Household finances are unpredictable. Changes in employment, unexpected expenses, and major life events mean people’s budgets constantly change. Those changes in people’s finances - volatile incomes and unexpected events - are the major cause of financial difficulty. Of the 2.7 million people we helped last year, 4 in 5 had experienced a recent change in circumstances.

• Unpredictable finances aren’t new, but a decade of low wage growth has left people poorly placed to respond to them - they are financially insecure:  

• 1 in 10 (9%) households spend more than 80% of their income on essentials[1]
• 6.7 million households have no savings[2]
• 1.4 million households have been overindebted for over 2 years[3]

• People need greater financial stability - particularly those in insecure work. But to some extent, unpredictable finances are inevitable. Helping people have greater financial security - so they can respond to those changes and stay out of financial difficulty - is a major opportunity to improve the living standards of UK households.

1. Household finances are unpredictable

1. The majority of people we helped last year needed help because of a recent change in their circumstances. Of the 2.7 million people we helped last year,  4 in 5 had experienced a recent change in circumstances. At the individual level, household finances are constantly buffeted by changes - in their income, their outgoings, and through wider changes in their lives.

Incomes are unpredictable

2. From one year to the next a third of households will see their income change by 25% or more. Over time, that means it is common for working age households to move up and down the income scale. Around half of the poorest and richest 20% of households in 2015 were in the same position in 2010.[4]

3. This volatility not only happens year on year, but month by month. In recent nationally representative polling, 46% of respondents reported some increase in their household income from month to month and 40% saw a decrease. The average largest increase was £343 and the average fall was £385. Our recent research found young people and those in insecure work were most likely to have unpredictable income.

Unexpected expenses are common

5. As well as unpredictable incomes, people face uncertainties on the other side of their household budget - unexpected expenses. More than half (57%) the people we recently surveyed reported one or more unexpected expense in the last year, such as repairing a car, replacing a household appliance, or a home repair. With many people holding little in the way of savings, the impact of those unexpected expenses on people’s budgets is substantial. The median largest unexpected expense in the last year was £450. Nearly 1 in 3 people said their household had an unexpected cost of over £1,000.

Life events disrupt people’s finances

6. Significant life events - such as having children, separating from a partner or a period of poor health - are expensive and can be accompanied by a period out of employment. Nearly one in three (29%) UK adults experienced some type of life event in the past year. Those who had experienced a life event during the past 12 months were nearly twice as likely to report that their income was ‘a lot lower’ than the previous year - 15% compared with 8% amongst those who had not experienced a life event.

2. People are financially insecure

7. Large numbers of households are poorly placed to deal with that unpredictability - they are financially insecure. Primarily that insecurity is the result of a lack of wage growth. Average earnings are still below what they were in 2007 - and recent price increases mean the value of people's pay packets are now falling. The lack of wage growth has left large numbers of people with little room for manoeuvre when things go wrong.

People have no slack in their budgets

8. Looking at the Living Costs and Food Survey we identified that more than 1 in 5 (21%) households spend more than 60% of their income on essentials each month, and nearly 1 in 10 (9%) spend more than 80%. Those households may be making ends meet - but only just. In particular, households with an annual income of less than £20,000, self employed households, and private renters find themselves with little additional income to spend on unexpected expenses or costs.

9. High levels of spending on essentials is driven by housing costs with the two lowest income quintiles spending 19% and 16% on average of their income on housing, compared to an average of 12%. But it is not solely due to housing costs:

• These households also spend a large proportion of their income on food and drinks (15% and 14% respectively).
• Utilities such as fuel, light, power and water and sewerage make up a large share of spending for those in the bottom income groups. 11% combined for under £10,000 compared to 3% for those with incomes between £40,000-49,000.

Many households do not have savings to fall back on

10. 6.5 million households have no savings, meaning they have nothing to fall back on when they have to meet an unexpected expense.[5] Our research shows that people with unpredictable incomes are less likely to save, 38% compared to more than half of households with a stable income. Qualitative interviews reveal that many households do save but are frequently required to draw down their savings meaning they don’t build up a buffer for when things go wrong.

People have already maxed out their borrowing

11. Consumer borrowing grew by more than 10% last year, its fastest rate in over a decade. On aggregate that debt may not be a problem, but large numbers of households have unaffordable debts. 1.4 million households have been overindebted for over two years.[6] Beyond consumer borrowing, however, there is a hidden problem of debts on household bills. Citizens Advice now helps more people with arrears than with consumer credit debts. Persistent overindebtedness and debts on household bills are symptoms of squeezed household budgets and limit the ability of people to respond to changes in circumstances.

3. People pay a high price when they are financially insecure

Unpredictable finances force people to go without essentials

12. Without savings, people make ends meet by going without essentials. Among people whose incomes vary significantly from month to month:[7]

• 1 in 10 (10%) have gone without heating or electricity (compared with 5% among those with a stable income.)
• 1 in 5 (21%) have gone without food or essentials (compared with 8% amongst those with a stable income.

Changes in circumstances are a primary cause of problem debt

13. 8 of 10 of our debt clients say they had a recent change in their circumstances before needing debt advice. When people have low levels of disposable income, or no savings they are forced to borrow to make ends meet. Our wider research shows that both a fall in income or a sudden expenditure shock are common causes of financial difficulty:

• People who experienced a significant fall in income - defined as moving to a lower income quintile - were 33% more likely to fall into problem debt two years later.[8]
• Looking at people who were over-indebted in 2012-14, more than a third (34%) of people who were struggling with debt had not been borrowing at all two years earlier. The median amount of debt held by someone who has only recently taken on debts and is already struggling is just £663.

People who are financially insecure have to borrow to pay for essentials

14. When people have unpredictable budgets they are more likely to have to borrow just to pay for essentials. We found that people with high levels of income volatility were more likely to have used consumer credit to pay for day to day essentials.

• They are more than twice as likely to have used their overdraft to pay for essentials - 25% compared with 10% for people with stable incomes.

• Around 1 in 6 (17%) of people with highly volatile incomes have borrowed from friends and family, compared with 8% of those whose income are stable.
• People with volatile incomes are twice as likely to have ignored or delayed a bill or loan repayment in order to pay for essentials - 11% compared with only 5% of people with stable incomes.

Fees and charges often exacerbate people’s financial difficulties

15. When people do have to borrow to make ends meet, credit products make it hard for them to stay on top of their finances.  We found people with volatile incomes are more likely to have paid fees or charges on credit cards, overdrafts, and nearly 5 times more likely to have paid other late payment fees.

Credit products push people further into debt

16. As well as fees and charges, the nature of some credit products make it hard for people to stay on top of their finances. Three problems stand out:

• Unsolicited credit card limits make it hard for people to stay on top of their finances. The FCA found people in financial difficulty are just as likely to receive unsolicited credit limit increases as those classed as financially resilient by the FCA (28% compared to 27%). When people in difficulty received increases, they were more likely to increase their spending and had higher debts than those who didn’t.[9]
• High-cost credit pushes people into financial difficulty. Since the FCA introduced tougher regulations in the payday lending market, the number of people with unmanageable payday loan debts has more than halved. Yet, as illustrated in the table below, a number of other sources of high cost credit continue to cause significant problems. In the rent to own market for instance a third of loans have gone into arrears, in the doorstep loans market 25% have.
• Unarranged overdraft fees exacerbate financial difficulties. People with unpredictable incomes are twice as likely as those with stable incomes to pay overdraft fees (28% compared to 14%). High fees often mean unarranged overdrafts are more expensive than payday loans and compound short term challenges into long-term difficulties.[10]

4. People need more financial security

17. Changes in the labour market have made people less financially secure. With up to 4.5 million people in insecure work, more people have unpredictable paychecks and so are likely to be less financially secure. It is crucial that the government takes action to help people in insecure work to have more stable working lives.[11]

18. However, to some degree, unpredictable finances are inevitable - changes in circumstances and unexpected costs are a fact of life. Helping people have greater financial security - so they can respond to those changes and stay out of financial difficulty - is a major opportunity to improve the living standards of UK households.

People need support to save

19. The best way for people to improve their financial security - and be in a position to respond to changes in their finances - is to build a savings buffer.[12] However 6.5 million adults have no cash savings.[13]

20. Despite the importance of the first £1,000 savings, even excluding saving for retirement, overwhelming government support for saving goes to savers with high incomes and high levels of savings.[14] The introduction of Help to Save is a step in the right direction for savers but the only goes a fraction of the way to redress the scale of support for high-income savers.

Consumer credit products need to be safe

22. As well as savings, access to credit is essential to help people respond to temporary changes in their finances. For the vast majority of people borrowing is positive, allowing people to smooth their consumption over time as well as invest for the future. However the way credit products are structured often makes it difficult for people to stay on top of their finances.

5.  Advice can help people better manage their finances

26. As a provider of general advice services, we see the role that advice can play in helping people stay on top of their finances and build financially secure lives.  

Advice can help people respond to a change in circumstances

27. People wait until they are in crisis before getting debt advice. In general, clients are unlikely to seek debt advice until they are in a very difficult position.[15] Whereas, 1 in 3 people who came to Citizens Advice for help last year said it was when they had to take action urgently, nearly half of our debt clients (45%) turn to us at this stage.

28. When people go through a sudden change in circumstances advice services need to be available to help people get back on track. Currently, debt advice services are overstretched. Tens of thousands people with debt problems each year are currently unable to get through to our AdviceLine because it is over capacity. A focus on encouraging people to access advice earlier - before they get into crisis - needs to be matched by more resources to meet increasing demand.

Advice can help people plan for the future

30. Money advice services can also help prevent problems further down the line. Citizens Advice delivers face to face Pension Wise sessions on behalf of the government. Currently satisfaction rates are consistently over 90% and, after using Pension Wise, 93% of consumers felt informed about their options and 94% felt confident in their ability to avoid scams.

January 2018