Fixing family finances

1. Context
2. The study
3. Key findings
4. Points to consider

Context

It is of growing importance that individuals are able to collect and assess information in order to make informed financial decision. Consequences of poor financial decisions can be devastating. For example, 2.6 million people in the UK suffer from severe debt problems. Moreover, 12 million adults aren’t saving enough for their retirement. Financial situations like these can have a negative impact on both a families’ immediate and longer term living standards and even have a negative impact on wellbeing.

Beyond the individual impact of having good financial capability, the ability to make informed and effective decisions drives competition in financial markets and incentivises companies to provide better goods for lower prices, improve productivity and boost economic growth.

This report provides an original analysis of the third wave of the Wealth and Assets Survey (2010-12), undertaken by the Office for National Statistics, for five key components of financial capability using a household perspective. The key components are:

1. Staying informed: the extent to which individuals keep an eye on indicators of the wider economy;
2. Choosing products: the types of information that individuals use to consider and make financial decisions;
3. Making ends meet: the ability to live within financial means;
4. Planning ahead: the extent to which an individual puts aside money for potential future needs;
5. Organised money management: the extent to which an individual knows how much money they have, and how much they spend day-to-day.

It seeks to shed new light on the nature of the financial capability problem in Great Britain and discusses what actions can be taken to improve capability and outcomes for families.

The study

This is a secondary analysis of the Wealth and Assets Survey (2010-2012), in which 30,000 individuals aged 18+ were surveyed in Great Britain.

The results of a nationally representative poll of 2007 UK adults and a focus group held in December 2015 are also used to support findings in this report; however, no information has been provided as to the size or scope of the representative poll or the focus group.

While this report does not explicitly set out research questions, by using the household nature of the survey it assesses how families share responsibilities and asks whether social ties can reduce the impact of individuals’ low financial capability. Findings are grouped under two sections:

1. Financial capability in Great Britain
2. Family ties for mitigating poor financial capability.

Key findings

Financial capability in Great Britain:

• Scores across four components (‘choosing products’ was excluded in this analysis) are used to understand the extent to which there is a clustering of low and high component scores. Across the population: - 1.7% live in capability poor households - 95.4% live in mixed capability households - 2.9% live in capability rich households.
• Age: Low scores across the four components vary by age: - The likelihood of a poor score for ‘making ends meet’ and ‘planning ahead’ falls significantly with age - Young people (aged 16-24) score relatively poorly on ‘staying informed’, but scores for age groups older than 24 years are similar.
• Income level: There is a clear correlation between income and making ends meet, staying informed and planning ahead. Individuals in higher-income households score far better than those in lower income households.

Family ties for mitigating poor financial capability:

• Social networks could mitigate the impact of low financial capability. Extreme clustering of low (1.7%) and high capability (2.9%) households is relatively uncommon, with most households having members with a range of different capabilities (95.4%). In practice this means 71.2% of individuals with relatively low capability live with someone with a higher level of capability
• Those with low financial capability turn to friends and family to help guide their decisions (13% of those with low capability compared with 5% with high capability), but are less likely to be comfortable talking about their finances (43.8%) or involve them in making financial plans for the future (35.9%) than those with average (62.7% and 47.1% respectively) or high capability (74.1% and 48.8% respectively).

Recommendations:

The report recommends that a household approach to improving financial capability needs to be taken. The report provides a number of detailed recommendations based on the type of household the government wishes to target, i.e. capability poor, mixed capability or capability rich households.

As an overview, the recommendations included:

• Better deals on benefits and a collective switching initiative
• Rebranding and improving the existing ‘National Consumer Week’ to ‘Active Consumer Week’
• Prompting discussions with friends and family members by adding regulated questions and changes to risk warnings
• Improving the 'midata' scheme, facilitating the open API standard and taking them to the next level by developing a ‘Unified Data Portal’.

Points to consider

• Methodological limitations: The household nature of the Wealth and Assets Survey uses data on households where all adult members responded to questions relating to financial capability. This mean that the sample is skewed significantly towards the older population. It is also likely to overstate the level of capability and understate the existence of clustering of low capability. While this limits the analysis, it is - to date - one of the best available data sources on the overall capability of households.

Full report

Fixing family finances - full report