Mind the savings gap

The number of people in the UK with no savings at all has risen year-on-year from eight million to over nine million, or 1 in 5 of the UK adult population, according to the 2014 Scottish Widows Savings Report. This brings the proportion of people who have savings (67%) down to a level not seen since 2011.

Saving less 
The total number of people who are managing to save something has dropped from 14.8 million to 14.4 million (31% and 30% of the adult population respectively), and more than half (54%) of those surveyed said they were saving less than they did two years ago.

The report found that family pressures are continuing to have a big impact on people’s ability to save for the future. 41% of the population said they had loaned ‘a substantial amount’ of money to family members. A quarter of people had lent money to their children, most commonly to cover living expenses (35%), to put towards a house deposit (34%) or to pay off debt (28%).

Lending money 
The study found that lending to family members had a serious effect on parents’ and grandparents’ finances: a quarter (23%) of all parents and grandparents said they were saving less as a result of lending money to family members, and a fifth (17%) said they had to cut back on day-to-day living costs due to family lending.

Perhaps as a result of family pressures from generations above and below, those in the middle age bracket were found to be least likely to be saving anything at all. 1 in 4 (24%) 35-44 year-olds have no savings whatsoever, the highest of any age bracket, and those aged 35-44 years old and 45-54 years old had the lowest proportion of people who said they were saving at the moment (34% and 35% respectively).

Major contributor 
Debt was found to be a major contributor to this middle age group’s inability to put money away for the future – a third of 35-44 and 45-54 year-olds (33% and 30% respectively) said they would be encouraged to save more were it not for the debt they currently owe.
It is concerning that despite economic improvements, the number of people who are able to set something aside for a rainy day is actually falling. The widening gap in fortunes between savers and non-savers highlights the impact that getting on the path to saving can have, even if it is just by putting aside a small amount every month.

Short-termism 
The research clearly shows that many people are still only thinking in the short term. For instance, worryingly, almost half of the people surveyed said they still prefer to spend their money rather than save, and almost two thirds said they know they are not saving sufficiently for their long-term needs. This problem is exacerbated by family pressures that eat further into people’s savings, particularly for those in the middle age groups.

Source data: The survey was carried out online by YouGov who interviewed a total of 5,221 adults between 30 October and 8 November 2013. The figures have been weighted and are representative of all UK adults (aged 18+). The statistics used
(8 million, 9 million, 14.8 million and 14.4 million) are based on the 2011 Office of National Statistics (ONS) Census results whereby the UK adult population is stated to be 48.084 million.

Taking vital steps before the new tax year

Families impacted by the high income child benefit charge need to act now to limit or avoid it in the next tax year. Doing this could make them potentially up to £2,449 better off, but they only have until the 6th April 2014 to take some vital steps for the 2013/14 tax year, according to Standard Life.

The high income child benefit charge, introduced on 7 January 2013, affects more than one million families. A family with two children could see their annual income drop by up to £1,752 in 2013/14; those with three children could lose £2,449.

At a time when the cost of living is rising faster than incomes, Standard Life believes it is important for many families to know how they’ll be affected by the high income child benefit charge, and to find out what options they may have to improve their situation next year.

Child benefit payments will continue to be paid in full, but they will be clawed back by way of a tax charge if a person, or their partner, have an individual income of more than £50,000.

Ten key ways people may be able to limit the amount of tax they will have to pay in the 2013/14 tax year on their child benefits:

Make an individual pension contribution to reduce income to below £50,000. This would wipe out the High Income Child Benefit Charge altogether, and they will benefit from higher rate tax relief on their contribution.

If somebody can’t afford to make a contribution that reduces income to the £50,000 threshold, then any contribution reducing income to below £60,000 will still result in a surplus of child benefit over the tax charge. They would still have to complete a tax return though.

Make a pension contribution by salary sacrifice. With the agreement of their employer, an employee can reduce their contractual income in return for an equivalent employer payment to their pension. In addition to the tax savings above, the employee will also save National Insurance (NI) at 2% for payments over the upper earnings limit, and the contribution itself can be increased if the employer agrees to pass their 13.8% NI saving on to the pension. A contribution by salary sacrifice could mean that a tax return isn’t needed.

Some employers may also offer salary sacrifice for child care vouchers. This works in a similar way to making a pension contribution through salary sacrifice, although limits apply to the number of vouchers that can be purchased, so check to see if this is possible.

Where both partners are making a pension contribution, consider upping the highest earner’s contributions and reducing the lower earner’s. The adjusted net income of the highest earner will be reduced at no extra cost to the family as a unit. Child benefit tax may be saved, and higher rate tax relief can be claimed on the extra contribution.

Payments to charity under gift aid reduce taxable income in a similar way to an individual pension contribution. Gift aid payments are paid net of basic rate tax, and so must be grossed-up before deducting from income.

If the person being assessed to the tax charge is also the holder of income bearing investments, consider transferring these to their lower earning partner. As the gross value of savings income is included in taxable income, this simple solution could make a difference.

Do nothing. Continue to claim the benefit and pay the tax. This is more likely to be a consideration for those families where the higher earner has adjusted net income between £50,000 and £60,000, when the benefit will still exceed the tax charge. They may not be able to afford to see their net spendable income fall further by making a pension contribution. Again, this group should be reminded of their obligation to complete a tax return.

Where the high earner has taxable income in excess of £60,000, some families may conclude that it’s not worth making a claim for child benefit in the first place. After all, they won’t be any better off financially. But there’s still an incentive for some. Assume that one parent stays at home to look after the children and doesn’t work. As they won’t be paying national insurance (NI), they won’t be building up any entitlement to State Pensions. But by claiming benefit for a child under the age of 12, they will receive NI credits which will protect their entitlement.

A family can still claim child benefit, perhaps for the reasons above, but avoid the tax charge by asking HM Revenue & Customs (HMRC) to stop the payments. The high earner will then only be taxed on any payments received up to the date payments stop. A self-assessment return will still have to be filed if any payment is received in a tax year. Payments can be restarted if a client’s circumstances change.

Increases in the cost of childcare

The cost of bringing up a child has reached £227,266, up from £222,458 last year, with the first year of a child’s life seeing the largest increase.

According to the annual ‘Cost of a Child’ report from protection specialist LV=, the cost of a child’s first year has risen by 50% (£11,025 up from £7,372) since the first report in 2003. In the past 12 months, it has increased by 5% and this is largely due to the cost of childcare for children aged less than a year (1) rising by 7% (£6,623 up from £6,191 in 2013). In total, parents now spend £66,113 on childcare – an increase of 4% overall.

Education and childcare remain the biggest costs, and 71% of parents report that they have been forced to make cuts to meet the financial demands of raising their family. The overall cost of raising a child has increased by 62% since 2003.

The cost of living
Parents have been hit hard by increases in the cost of living, as more of their income is spent on essential goods and services such as rent, household bills and food – items that have seen particularly rapid inflation over the past few years (2). The overall cost of goods and services purchased by parents has increased by 33.6% in 10 years, compared with 30.7% for the headline consumer price index, meaning that prices have been rising almost 10% faster for parents (3) than the general inflation rate. Single parent’s families have been hit even harder with the overall cost of goods increasing by 34.7% over the same period. This comes at a time when many benefits have been put on hold and wages have not kept up with inflation.
The increasing cost of raising a child means that parents are now estimated to be spending on average more than a quarter (4) (28%) of their annual income on bringing up their child each year – up from 23% in 2004. For single parent families, this figure rises to more than half (54%) (5) of their annual income.

Working more hours
Alongside the rising cost of raising a family, the changes to Child Benefit in January 2013—which saw many families lose some or all of their child benefit—have affected many households. One in four mums (27%) have returned to work earlier than they wanted to and close to one in five (19%) have had to work more hours than they intended to. Meanwhile, one in ten parents (11%) have now chosen to have a smaller family, and one in five (21%) are delaying having an additional child because they now can’t afford it.

However, with the cost of average childcare costing £405 (6) a month across Britain, mums now say they personally need to earn an average of over £26,000 a year to make it worthwhile returning to work.

Protecting the family finances
The need to make the family finances go further has taken its toll on the amount parents are likely to put aside for the future. One in three (34%) say they’ve had to reduce the amount they save, and one in 10 (10%) have had to cancel or review their insurance products and income protection cover to help with family budgeting. In fact, 41% of parents now have no life cover, critical illness or income protection cover at all.

Source:

Cost of a child calculations, from birth to 21 years, have been compiled by the Centre of Economic and Business Research (CEBR) for LV= in December 2013 and is based on the cost for the 21 year period to December 2013. Using data from the ONS’ Family Expenditure Survey, CEBR also were also able to compile a measure of inflation for families, in contrast with the overall CPI measure.

Additional research was conducted by Opinium Research from 13 to 16 December 2013. The total sample size was 2,001 UK adults and was conducted online. Results have been weighted to a nationally representative criteria.

1. CEBR’s model assumes that parents go back to work after 6 months (what’s known as “ordinary maternity leave”). It then tracks the cost of childcare for the remaining 6 months of the first year, using a combination of data from the Office for National Statistics and desk research from other sources. This cost has increased significantly over the past 12 months.
2. Calculated as December 2013 versus December 2003. Single parent households on average have significantly lower income than two parent households [£19,444 for the average single parent household, versus £38,762 for the overall UK average household and £52,140 for two parent households]. This means that a much greater share of expenditure is made on essential items such as rent, household utility bills, and food. It is these products that have seen particularly rapid inflation over the past few years [e.g. the December 2013 inflation figures showed a 3.7% annual increase in the cost of rent and utilities], whereas prices on more luxury items such as recreation & culture have seen smaller increases [the same figures showed just a 0.8% annual increase in the cost of recreation and culture]. As such, the total basket of goods and services purchased by these single parent households has seen faster price inflation than the basket of those bought by two parent families.

3. Family households spend a much greater share of expenditure on essential items such as rent, household utility bills, and food. It is these products that have seen particularly rapid inflation over the past few years.

4. According to CEBR, the cost of raising a child from birth to 21 now costs £227,266 or £10,822 per year. The average (mean) annual household gross income is £38,762. This equates to 28% of the average income spent per year on bringing up a child i.e. £227,266 divided by 21 = £10,822. 100 divided by £38,762 x £10,822 = 28%. In 2003 this was just 23% (in 2003 the cost of raising a child was £140,398 or £6,686 per year. The average mean annual household income was £29,406 so £140,398 divided by 21 = £6,686. 100 divided by £29,406 x £6,686 = 23%).

5. Due to the lower income of single parent families, the average annual cost of raising a child is equivalent to 54% of average gross annual income of £20,000.

6. According to DayCareTrust the average cost of childcare across Britain is £101.29 per week (for 25 hours) x 4 = £405.16. (Child Care Costs Survey 2013, page 4)