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Chapter Five Financial Management

Introduction

5.1 In "Promoting Financial Inclusion" (The House of Commons, 2004b) HM Treasury identified the absence of savings as an integral element in financial exclusion. In support of this assertion, the report of the House of Commons Treasury Committee (2006b) noted the important role of savings in increasing financial inclusion. Savings not only provide a buffer in times of financial hardship, they also reduce the need to rely on expensive forms of credit. The accumulation of savings is also seen to draw people into the banking system thereby increasing familiarity and trust in financial institutions.

5.2 The purpose of this Chapter is to determine the extent of saving and investment activity across Scotland and look at the characteristics of those people who have savings and investments. The Chapter will consider:-

• The extent of savings and investment activity in Scotland;
• The new financial excluded;
• Access to financial advice; and
• Perceptions of financial management.

Extent of savings and investment in Scotland

5.3 In spite of the well documented benefits of saving, a recent survey by the FSA found that 43% of people in the UK had no savings at all ( FSA 2006). In addition, a further 15% had savings of less than half of their monthly income. In Scotland, only 42% of people living in households with an income of under £10,000 a year had any savings or investments (Scottish Executive, 2005). Additional information on saving activity is available through the Families and Children Study (Lyon et al, 2006). This found that 39% of families with children in Scotland saved on a regular basis. It was also reported that most were saving for the future or for no particular reason (14% and 13% of respectively).

5.4 Reasons put forward by the House of Common Treasury Committee (2006b) to explain a lack of savings among financially excluded households included:-

• Saving being seen as unaffordable;
• High levels of personal debt;
• Inflation in house prices with a resultant decrease in disposable income; and
• Saving not being high on the agenda of the financially excluded and those on low incomes.

5.5 Before examining the evidence on savings and investments from the SHS and other data sources, it is important to note that such data should be treated with caution as questions relating to assets are sensitive and tend to produce a lower response rate than questions concerning other subjects. In addition, the Department of Work and Pensions suggest that there may be some underreporting of capital among survey respondents, both in terms of the actual value of assets and the investment income.

5.6 The SHS gathers data on savings and investments, as well as their value. The proportion of those with savings has remained relatively stable in recent years, at just over 50% (Table 5.1). Although the proportion of respondents who hold savings or investments appears to have declined slightly from 53% between 1999 and 2004 to 51% in 2005/06, this might reflect the fact that the 2006 data is currently only based on 3 quarters.

TABLE 5.1 Percentage of respondents with savings or investments
(Household Information)

Source: Scottish Household Survey Data

5.7 Analysis of the 2005/06 SHS revealed that:-

• Households in which the HIH was male were more likely to have accumulated savings or investments, 56% compared with 43%;
• 66% of households in which no members had a long term illness or disability stated that they had accumulated savings or investments. This is compared to 48% in those households where one person had a long term illness or disability;
• Savings and investments were significantly more common amongst those respondents who owned their own home (67%) or were in the process of buying with the help of a mortgage (61%), than amongst those who rented from a private landlord (35%), housing association (23%) or local authority (22%) ²⁰;
• Saving was most common among older couples and small adult households (60%) and least common among single parent households (20%); and
• Savings and investments were more common amongst older respondents, with over 50% of people aged over 35 stating that they had savings or investments. The rate of saving is highest among those aged 60-74 (55%) and lowest among those householders aged 16-24 (27%).

5.8 These findings are supported by the findings of the Family Resources Survey 2004/05 which revealed above average saving activity in households with one or more adults over pension age for all categories of savings above £3,000 (Table 5.2).

TABLE 5.2 UK Households by amount of savings and composition
(Column percentages)

Source: Family Resources Survey Data 2004/05

5.8 Unsurprisingly, the SHS revealed a statistically significant relationship between savings activity and economic status. Savings and investments were more common among households in which the HIH was self employed (65%) and least common in households where the HIH was unemployed and seeking work (12%) (Table 5.3). This relationship was also evident when savings were considered in relation to annual household income (Figure 5.1)

TABLE 5.3Household savings and investments by economic status of HIH 2005/06
(Household Information)

Number of respondents: 27070
Source: Scottish Household Survey Data

FIGURE 5.1 Savings and Investments by net annual household income 2005/06
(Household Information)

Number of respondent: 26,038
Source: Scottish Household Survey Data

5.9 Analysis at the local authority level showed Orkney to have the highest level of savings, with 76% of respondents stating that they had savings or investments. This was followed by East Renfrewshire and Aberdeenshire, where 71% and 69%, respectively, had savings or investments. Levels of saving were significantly below average in Dundee City (32%) and Glasgow City (38%).

5.10 The level of saving and investment activity among residents of the 15% most deprived Scottish areas, as defined by the SIMD, were considerably lower than in the rest of the country. 27% of respondents from the 15% most deprived areas possessed savings or investments in 2005/06, compared to 56% of respondents in the rest of the country.

5.11 Using the Scottish Executive's 6 fold rural:urban classification, there appears to be a steady increase in the prevalence of saving as the area becomes more remote with approximately 45% of respondents from large urban areas and 62% from remote rural areas stating that they had savings or investments (Figure 5.2).

FIGURE 5.2 Prevalence of Savings and Investments by Scottish Executive 6 fold Rural:Urban Classification 2005/06
(Household Information)

Number of respondents: 27,067
Source: Scottish Household Survey Data

5.12 The values of savings and investments held by respondents to the SHS between 1999 and 2006 are shown in Table 5.4. It would appear that levels of savings have remained relatively constant in recent years with the largest proportion (between 17% and 19%) of households which possessed savings or investments, having in the region of £1,000 to £4,999. It can also be seen that:-

• There has been a steady decline in the proportion of respondents with savings or investments of under £1,000. This has been paralleled by an increase in those having savings in excess of £10,000: up from 25% in 1999/00 to 29% in 2005/06;
• A relatively small proportion of respondents in each year have savings or investments worth over £75,000; and
• Around 30% of respondents each year refused to disclose the value of their savings or investments ²¹.

TABLE 5.4 Value of savings or investments 2005/06
(Household Information)

Source: Scottish Household Survey Data

The New Financial Excluded

5.13 The Executive's definition of financial inclusion now covers skills, knowledge and understanding. As such this analysis needs to take account of those who, on many definitions, are financially included, in that they have access to financial products and services, but who get into serious financial problems. Although the state of the economy clearly has an impact upon financial problems it may also be that some of those who experience these problems may lack the necessary skills, knowledge and understanding to deal with the financial services industry and its marketing strategies.

5.14 Evidence of this can be seen from the published figures on sequestrations ²² and Protected Trust Deeds ²³ within Scotland (Table 5.4). The trend has been for a steady increase over time in both. Protected Trust Deeds have also grown in importance relative to sequestrations.

TABLE 5.4 Sequestrations and Protected Trust Deeds Scotland 1998 - 2006

Source:
The Insolvency Service, 2007, Statistics Release: Insolvencies in the Fourth Quarter, February, Policy Directorate: Statistics.

5.16 There seem to be 3 main reasons for these increases in sequestrations and registered Protected Trust Deeds:-

• The ready availability of credit and the associated problems that a minority then seem to get into;
• The difficulties that a minority have in paying Council Tax. This has been paralleled by a greater willingness of local authorities to push for sequestration to recover their debts, even though the average dividend paid ²⁴ tends to be low. For example in the year ending 31 ^st March 2006 the average dividend paid was 14.8p in the pound. This compares to the average of 21.9p in the pound for Protected Trust Deeds over the same period (Accountant in Bankruptcy, 2006).; and
• A growth in fee charging advice agencies that promote Protected Trust Deeds as a way of overcoming financial problems.

Countering these problems may require more readily accessible financial advice to be available.

Financial Advice

5.17 A key facet of promoting financial inclusion lies in ensuring that consumers have access to appropriate financial advice (including debt and advice on such things as budgeting and saving). Such advice could act to both increase awareness and give people the ability to access "appropriate" financial services.

5.18 However, the report of the House of Commons Treasury Committee (2006b) outlines evidence submitted by Citizens Advice suggesting that financial advice services were increasingly oversubscribed, displaying evidence of a significant unmet need. This was supported by the fact that the waiting times for specialist services were very often several weeks.

5.19 Lack of provision of financial advice may be particularly acute amongst those earning between £10,000 and £22,000 (not the traditional focus of financial exclusion studies). The House of Commons Treasury Committee (Ibid) suggests that around 8 million consumers with earnings in this bracket find it difficult to access generic financial advice which is separate from the sales process.

5.20 The Resolution Foundation, a research and policy organisation focusing on how advice needs can be met by either the public or private sectors, has stated that:-

"Basic rate taxpayers largely fall outside of the catchment criteria for financial advice in the UK. Most free advice services cater to the remedial needs of those already in serious debt. Meanwhile, the financial services industry tends only to offer advice when connected with a product sale. At these income levels, such sales are just not attractive to most product providers who focus on the most profitable customers" (quoted in The House of Commons, 2006b).

5.21 This issue is recognised in government and policy is now being developed to help address the problem (Paragraph 2.46). The extent to which the inability to access advice is an issue in Scotland is not known as this is not covered by the SHS, although self-perceptions of financial management are considered.

Perceptions of Financial Management

5.22 Perceptions of the financial situation of SHS respondents between 1999 and 2006 are shown in Table 5.5. The Table shows that perceptions of how the household manages financially have remained relatively stable in recent years, with a slight tendency towards an improvement.

TABLE 5.5 Perceptions of Financial Situation
(Household Information)

Source: Scottish Household Survey Data
Note:-
1. It is not clear why it is not possible to access the whole sample for 2003/04.

5.23 When perceptions of management are considered at a local authority level, the proportion of respondents stating that they manage "Very well" was highest in East Renfrewshire and Shetland (23% each) and East Dunbartonshire, Aberdeenshire and Stirling (21%), whilst the authorities with the lowest proportions of respondents stating that they manage "Very well" were Falkirk (8%) and Glasgow City and Dundee City (10% each). Again this seems to indicate that there is a relationship between the levels of deprivation and poverty in a local authority and ability to manage ones finances.

5.24 In keeping with findings relating to other aspects of financial inclusion, in 2005/06 only 7% of respondents resident in the 15% most deprived data zones believed that their household managed "Very well" financially. This compared to 16% in the rest of Scotland in 2006.

5.25 When perceptions are considered in terms of the Executive's 6 fold rural:urban classification the proportion of respondents who considered their household to manage "Very well" was lowest in large urban areas (13%) and highest among respondents from accessible rural areas (18.5%).

Conclusions

5.26 The data shows that a large minority of people within Scotland have no savings, although this is proportionately no different to the general situation in the UK. Unsurprisingly, the level of savings is associated with such factors as home ownership, being in work and being older so that there has been time to accumulate assets. Given these factors the spatial relationship of savings levels with deprivation is to be expected.

5.27 Given that definitions of financial exclusion now cover education and knowledge, it seems that there are increasing numbers of people who may not be excluded based on the traditional definitions of access, but who may be when their ability to manage their finances is considered. The increases in the numbers of sequestrations and Protected Trust Deeds registered would seem to indicate that the inability to manage money is increasing.

5.28 The rise in the apparent numbers of those who have problems in managing their finances has placed pressure on the money advice services. There also seems to be evidence of a gap in these services, particularly affecting those who are on modest earnings. The increase in the numbers of those with severe financial problems is likely to make it even harder for this group to obtain advice.

5.29 Paradoxically, the numbers of those who feel that they manage their financial affairs well has tended to increase slightly whilst those who feel they "Don't manage very well", "Have some problems" or are in "Deep trouble" has remained constant at around 10%. That these self perceptions have not changed, at a time when there have been considerable increases in such indicators of bad management as sequestrations (up 70% between 2002 and 2006) and Protected Trust Deeds (up 79% over the same period) may reflect the fact that in absolute terms these are still rare events.

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