Despite the best attempts of policy makers, regulators and consumer groups, UK households do not save enough. The clear links between saving, wellbeing, living standards and economic growth make the UK’s poor saving performance a major social policy concern.
This report builds on previous SMF work and research from other organisations to set out a comprehensive framework with which to understand the UK’s poor savings behaviour. It outlines three key savings motives that each household will have:
- Rainy day motive: to build a buffer stock with which they can meet unexpected expenses and manage if they see their earnings fall;
- Retirement motive: to smooth incomes over the life course and provide for themselves in retirement, when their earnings potential is lower; and
- Goals motive: to meet their long-term spending goals, for instance by saving for a holiday, new car, house deposit or home improvement or providing for the costs of children’s education.
We use original analysis of the Wealth and Assets survey to show that the majority of households are either failing to save at all, or have a deficient level of saving for one of their savings motives.
The report then argues that the UK’s savings problem runs much deeper than just a deficiency in saving. In short, the UK’s problem is not just the amount of saving that households undertake, there is also a wider problem with the behaviour of those who do actually choose to save. This is typified by a bias for “riskless” and easily accessible asset classes which leads to a reliance on current accounts, cash savings accounts and cash ISAs for very large proportions of overall savings portfolios.
This reduces the returns to individual savers and, in the current low interest rate environment, often means that savers are seeing their savings lose value in real terms. A lack of diversification also limits the extent to which saving and investment activity can boost the economy. A wider allocation of savings across asset classes and investment products could have a number of positive economic impacts. For instance it could stimulate investment in SME’s, business start-ups and fast-growing companies that have sometimes struggled to secure lending from high street banks.
This means that helping UK households to save more and save better could increase living standards for all households, help those struggling to get by to be better able to manage and provide a much needed injection to UK businesses and economic growth. But doing so will take radical action to end the cash bias and create an asset owning democracy where all households have a stake in the economy and gain from the UK’s economic growth.