Household finances: Income, Saving and Debt. Treasury Committee Report published

Last month the Treasury Committee released its report on Household finances.

On Debt.

Among some of its key findings it reported that many households lack a ‘rainy day’ savings buffer and were over-indebted.

It also found that ‘uncompromising’ local and central government debt collection should be reformed and the Financial Conduct Authority (FCA) should move forward with regulation to limit the cost associated with high-cost credit, including overdraft fees, urgently.The FCA’s cap on payday lenders has proven to be beneficial for consumers. Earlier this year, the FCA published the outcome of its high-cost credit review, which includes proposals on overdraft fees, rent-to-own, home-collected credit, and catalogue credit and store cards. The FCA shouldmove forward with these proposals urgently.

On Debt collection, it found that practices and methods used by public authorities were the ‘worst in class’

Recent news reports and research from charities have shown that there is a hidden mountain of debt caused by households’ inability to pay basic bills.  People become over indebted not just by having to use conventional credit such as credit cards to keep on top of things but through arrears on their bills, including those, such as council tax, owed to central and local government.  The report concludes ‘that debts are often pursued ‘over zealously, ‘uncompromisingly’ and with routine recourse to bailiffs. The Treasury report also says that this approach risks driving the most financially vulnerable people into further difficulty and debt.  It concludes that the public sector should raise its standards to the level of industry best practice.

On Savings.

ISA tax relief does little to incentivise saving for lower income savers and the Government needs to do something about the ‘looming crisis’ from the 12 million people who are ‘pension under savers’.  The self-employed should also be brought into the pension auto enrolment scheme. Lifetime ISA should be abolished due to its perverse incentives and complexity and that pension tax relief does not incentivise saving

When it comes to savings the Report said that the government’s principalsavings incentive takes the form of tax relief on interest, primarily through ISAs. Yet there is little evidence that tax relief is an effective way of encouraging potentially vulnerable households to save for a rainy day.

There is, however, more evidence that cash bonuses and direct matching schemes, such as the Help to Save scheme, are better at helping people build a precautionary savings buffer. The Government should update Parliament on the usage of such schemes and its efforts to increase take-up. It should also consider widening the eligibility criteria.

The Lifetime ISA has been strongly criticised for its complexity and its inconsistency with the other parts of the long-term savings landscape, which has contributed to its limited take-up by customers and providers. The Government should abolish the Lifetime ISA.

The main financial incentive that the Government provides for long-term saving is tax relief on pension contributions. This is not an effective or well-targeted way of incentivising saving into pensions. The Government may want to consider fundamental reform. However, the existing state of affairs could be improved through further, incremental changes. The Government should consider replacing the lifetime allowance with a lower annual allowance, introducing a flat rate of relief, and promoting understanding of tax relief as a bonus or additional contribution.

If the state pension triple lock is maintained in the long term, the state pension will rise relative to earnings indefinitely. This is clearly unsustainable. However, replacing it with earnings-uprating could increase the number of under-savers. The next auto-enrolment review should explore the options for making up with private savings the shortfall that could result if the triple lock were abandoned in the future.

 On Pensions

The report recommended that the government must act now to tackle what they call a ‘looming crisis’ from under saving for pensions.

Since auto enrolment has been introduced the number of ‘pension under savers’ has reduced by 2 million but the Committee say that there are still 12 million people who are not saving enough for their retirement.  This is according to the government’s own research and they must act now if a future crisis is to be avoided.

The committee also report that there was an urgent need to bring those who are self-employed into the ‘auto enrolment system.’   The concern is for the number of self-employed, including ‘gig economy’ workers are not covered by the system.  The government, it says, has no clear strategy or timetable for doing this and should consider making use of self-assessment and national insurance contributions to auto enrol the self-employed.

On Household Finances.

 In part of its summarising the Committee concluded thatIt is the Treasury—and not the financial regulators—who bear overall responsibility for ensuring that low rates of saving or high rates of indebtedness do not imperil long-term economic stability or living standards. In the next Budget, the Treasury should report on the state of household finances, identify the key risks to the financial resilience of households, and set out its strategy for addressing them.

Commenting on the Report, Rt Hon. Nicky Morgan MP, Chair of the Treasury Committee, said:

“Many households are facing challenges that are putting pressure on the health and sustainability of their finances. Over-indebtedness, lack of rainy day savings and insufficient pension savings are some of the weaknesses in the household balance sheet identified in this inquiry.

The Committee’s report makes a series of recommendations for the Government to consider that would help households ensure that their finances are as resilient as possible,

Whilst financial service regulators and guidance bodies have important roles to play, the Government should not pass the buck to them.”