Action needed to tackle Britain’s £74bn savings shortfall, warns think tank

People should be able to “borrow” money out of their pension pot to cope with pre-retirement financial challenges, a think tank has suggested.

Making pension pots more accessible during people’s working lives would help them to cope with big life events or difficult circumstances, the Resolution Foundation said.

Britain has a £74 billion savings shortfall, versus a country in which every working age family has at least three months’ income in precautionary savings, according to the Foundation.

To help combat this, it proposed that a “sidecar savings” scheme should be set up alongside workplace pensions.

The Foundation said that people should also be able to borrow money from their pension pots. Under the pension freedoms, people have to wait until they are aged 55 to access their pots.

The report proposes allowing savers to borrow the lesser of £15,000 or 20% of the value of their pension pots, to help people deal with pre-retirement financial challenges. These loans would be paid back via higher contributions directly into their pension pot at a later stage.

This more flexible approach already works well in the United States, according to the think tank, which is focused on improving the living standards for those on low to middle incomes.

Families face a “triple savings challenge” of saving more for rainy days, bigger life events and retirement, the Foundation said.

The Precautionary Tales report – part of a partnership with the abrdn Financial Fairness Trust – found that around one in three (30%) working age families do not have a basic rainy day savings pot of at least £1,000.

Households with low savings are more likely to rely on credit cards, overdrafts, or borrowed money to meet daily expenses, the Foundation said.

While modest savings of £1,000 can help with unexpected costs such as broken fridges and car repairs, bigger savings are needed to cope with bigger life events such as unemployment or a family breakdown.

Not enough families have bigger savings pots either, with less than half (49%) of working age families having savings worth at least three months’ income, the Foundation said – estimating that Britain has a £74 billion savings shortfall.

Automatic enrolment into workplace pensions has increased the proportion of people saving for their retirement, but many are still not saving enough for an adequate later life income (at least two-thirds of their pre-retirement income).

Around two-fifths of working age people fall into this category, the report found.

The report calls for minimum auto-enrolment contributions to be gradually increased from 8% to 12% of qualifying earnings, with employer and employee contributions equally matched at 6% each.

Currently, the 8% minimum comes from employers paying in at least 3% and employees making up the remaining 5%.

These 12% contributions should include a 2% contribution into an easy access “sidecar savings” scheme of up to £1,000, with contributions above this level going into a pension pot, the report suggested.

The Foundation said this would revolutionise the number of families with “rainy day” savings in the same way that auto-enrolment has transformed pension saving, while also boosting people’s retirement incomes.

Molly Broome, economist at the Resolution Foundation, said: “Families across Britain face a triple savings challenge – not saving enough for rainy days, bigger life events, or for a decent income in retirement.

“One in three families in the country have less than £1,000 in savings – which left many people exposed during the cost-of-living crisis – while around 13 million individuals aren’t saving enough for an adequate income in retirement.

“We can address all three challenges by building on the success of pensions auto-enrolment to opt more people into both easy access and long-term saving.

“We should also offer people more flexibility over their pension pots, as other countries do, in order to help them with difficult circumstances. These reforms will improve families’ financial resilience during their working lives and into retirement too.”

Mubin Haq, CEO of the abrdn Financial Fairness Trust, said: “Britain is not a nation of savers. Too many have little to fall back on, lacking the rainy day buffers that prevent a drama turning into a crisis.

“Savings are essential to weathering economic shocks but current financial initiatives have done little to boost savings for those who need them most. Greater contributions are also needed to prevent hardship in retirement.

“Pensions auto-enrolment offers a great opportunity to provide a safety-net millions don’t currently have. This would cover the funds needed for those rainy days, for when life shocks happen and help provide a decent income at the end of our working lives.”

The report used a survey of more than 8,300 people by YouGov in October 2023.

A Department for Work and Pensions spokesperson said: “Automatic enrolment has already helped nearly 11 million people save for their futures, with £116 billion saved in 2022. Also the number of eligible private sector low earners now saving for a pension has risen from 17% in 2012 to approaching 80% today.

“And to help those on the lowest incomes save, we offer targeted support including through our Help to Save Scheme which offers a 50% bonus on monthly deposits of up to £50 and saw use increase by over a quarter in the last year alone.

“We also encourage people to take advantage of the Government’s Midlife MOT offer, which helps them take stock of their finances and plan for retirement.”