DEBT AND THE FAMILY

Introduction and background

Dealing with the existing legacy of personal debt in the UK will be one of the most difficult public policy challenges over the coming years for policymakers, financial regulators, the financial services industry, consumer groups, debt advice charities, and, of course, consumers. However, the changing economic environment means that life is likely to get even worse for many vulnerable consumers, large numbers of whom will already be at risk of over-indebtedness. The financial health of these vulnerable consumers will be shaped by a ‘perfect storm’ of socio-economic factors such as a legacy of debt, low economic growth, high inflation, reduced real household incomes, and the impact of deficit reduction measures.

Without the right support and advice, over-indebtedness can be devastating for people leading to serious financial and psychological distress. But, over-indebtedness has a wider impact on households too. It affects their living standards, ability to save and build up assets, provide for a pension, afford insurance or get on the housing ladder.

As the UK’s leading debt advice charity, protecting and improving the financial health of vulnerable consumers by making sure they get the help they need, developing the necessary policies to protect their interests and, importantly, ensuring their plight is not forgotten is the Consumer Credit Counselling Service’s (CCCS) priority.

Central to this mission is good research to identify who is most at risk. The impact of over-indebtedness and changing economic conditions will be felt in different ways by specific groups of consumers. The two main categories that seem most obviously vulnerable are:

benefit dependent households; and
lower to medium income households (sometimes called the ‘working poor’ or the ‘squeezed middle’).

But, if we are to target interventions to greatest effect, it is important that more is known about which specific groups of consumers are likely to be worst affected by changing economic conditions. The regular contact CCCS has with thousands of people means the charity has unrivalled access to invaluable data on how debt is affecting vulnerable households. It intends to leverage this research to raise the profile of some of the most vulnerable households and communities, stimulate debate and influence the policy agenda.

Therefore, it asked The Financial Inclusion Centre (The Centre) to produce a series of three major linked reports on the theme of Debt and The Family.

The Debt and The Family series consists of the following specific reports:

Debt and household incomes – analysing the experience of households with different incomes;
Debt and the generations – analysing the debt experiences of different generations in the UK; and
Debt in the regions – comparing the experiences of households in the different regions of the UK.

In each report, The Centre looks at debt and gender given the impact of deteriorating economic conditions on women. An Introductory pamphlet introduces the Debt and The Family series, explaining what we set out to do in each report and can be found here: Introduction_debt_and_the_family_series.pdf

Debt and Household Incomes

Report abstract

While we always knew that lowest income households were financially vulnerable, analysis of existing data and new analysis of CCCS data exposes a shocking level of financial vulnerability amongst lowest income households.

The financial position of many households has eased due to record low level interest rates, but many households continue to struggle. The financial health of these vulnerable households will be shaped by a range of socio-economic factors such as high inflation, reduced real household incomes and the impact of deficit reduction measures. For these groups, the future is not bright.

The Financial Inclusion Centre estimates that 6.2 million households are ‘financially vulnerable’ – 3.2 million are ‘already in financial difficulty’ either in structural arrears or are already subject to some form of debt action, with a further 3 million ‘at risk’ of getting into financial difficulty because they are finding it hard to make ends meet and are vulnerable to increases in household bills.

A summary of the report can be found here: Debt&Hd_summary.pdf

The full report can be found here: Report_Debt_and_household_incomes.pdf

Key findings from the report

· Homeowners with incomes of £13,500 or less have total debts worth a staggering 14 times their net incomes. Worryingly, half of clients in this group have no money left at the end of each month to repay their debts.

· Lowest income households are more likely to have no or little savings to fall back on and are more likely to have to rely on credit to get by.

· Many of the ‘at risk’ households are living hand-to-mouth relying on unsecured credit more than those already in severe financial difficulty.

· Those in the (£13,500 - £25,000) income group are 50 percent more likely to be in financial difficulty than the ‘average’ household.

· Over a third of CCCS clients earning between £13,500 and £25,000 have no money left at the end of the month to repay their unsecured debts.

· At least a quarter of middle earners (£25,000 to £50,000) counselled by CCCS don’t have any income to make repayments on their unsecured debt after basic living costs.

· For the last five years, 25 percent of middle income households contacting the charity have had nothing left at the end of the month to pay their mortgage.

· New analysis of FSA data estimates that 1.2 million mortgages (11 percent) are in some form of distress – already repossessed, in arrears, or subject to forbearance by lenders. The number of homeowners in financial difficulty is far greater than the 2.5 percent to three percent often quoted as in arrears or repossessed.

· There is a decline in the monthly budget positions of homeowners in the lowest income group over the last five years, from an average (or median) surplus of £51 (£65) in 2005, to -£450 (-£261) in 2010.

We estimate that 6.2 million households are financially vulnerable:

· 3.2 million households are already in financial difficulty, facing ‘structural’ arrears or some form of insolvency action

· 3 million households are ‘at risk’ of falling into financial difficulty, likely to fall behind with everyday bills, including housing costs

Specific groups who are vulnerable include:

· 2 million on low incomes (with an annual income of less than £13,500)

· 4.3 million with no/low savings (savings under £1,000)

· 2.2 million mortgagees (in arrears or who say they struggle to pay their mortgages)

· 2 million renters (in rent arrears or struggling to pay their rents)

· 600,000 lone parent families

· 1.1 million unemployed

Note: The combined figures will add up to more than 6.2m as some will be part of more than one ‘vulnerable’ group.

The report goes onto make a series of recommendations to protect vulnerable consumers.

Debt and the Generations

Debt and the generations was launched on 2^nd November 2011. This report investigates the personal debt and wider financial position of younger, ‘middle-age’, and older generations in the UK.

The report can be found here: Report_Debt_and_the_generations.pdf

Report abstract
The key findings from the report are:

· Plotting the level of debt against age shows that levels of debt rise to a peak as people reach their mid 30s-mid 40s. Nearly two-thirds (65%) of all debt is held by households aged 35-54. This has contributed to higher levels of financial vulnerability among these age groups, with the 40-44 age group, where we estimate there are 900,000 financially vulnerable people, most in danger.

· However, our research suggests that this situation may be changing, with consumers now acquiring large levels of debt, especially unsecured debt, much younger. Almost three-quarters of people in the 18-24 and 25-39 age groups now have unsecured debts, compared to around 60% of the 40-54 age group. This may be because younger consumers tend to be less financially aware and more inclined to rely on credit to make ends meet – between 12% and 14% of the 18-39 age group say they use credit ‘all the time’ for everyday expenses.

· Due to rising house prices and reducing incomes it seems unlikely that younger households will be able to acquire assets in the same way their parents and grandparents did. Between 1997 and 2007 the price of the average house grew from around 2.3 times to nearly 5.5 times gross earnings, meaning increasingly first time buyers (FTBs) can only get onto the housing ladder with help from the ‘bank of mum and dad’ – 45% of all FTBs in 2010 received financial assistance, compared to 20% in 2005. This is leading to the exclusion of poorer young households from the housing market and perpetuating existing disparities in wealth within generations.

· Student loans may also impact on the ability of younger household to acquire wealth. There are nearly 3.2 million student loans in place with total debt outstanding amounting to £35 billion, an increase of £13.25 billion over the previous three years. Total student debt outstanding is expected to grow to £153 billion in real terms by 2031, with loan repayments amounting to nearly £7 billion a year. With student loan repayments reducing available income, future generations will find it difficult to save or invest in pensions until they are older, which will impact considerably on their quality of life when they reach retirement age.

· Older households (55+) tend to be in a much stronger position, with many having acquired significant assets (including property) as they approach retirement. The decade in the run up to the financial crisis saw a huge transfer of wealth from younger home buyers to older generations through the mechanism of rising property prices and taken together the over 60s now own nearly half of all net assets in the UK. In contrast the under 30s own just 5%.

· However, one worrying issue uncovered by the report is that there is a previously overlooked minority of older people with extreme debts – for example, research suggests that 7% of those aged over 55 still hold secured debts greater than £150,000 – who are struggling to repay them. Our analysis shows that older households have a higher proportion of debtors with high repayment-to-income (RTI) ratios. Around 12% of those aged 55 and over have an RTI greater than 30%, compared to only 9% of the 18-24 age group. This indicates that some older households on lower incomes have been caught with expensive credit that is hard to escape.

· Finally, although our overall finding point to a worsening situation for younger consumers, it must be remembered that the current economic downturn is affecting all households. Our previous report, Debt and household incomes, found that 6.2 million people are financially vulnerable, and analysis of CCCS clients for Debt and the generations has shown that a £50 reduction in disposable income would increase this number significantly, by as much as 50% for some age groups.

Key recommendations

The priority must be to protect consumers from the aggressive practices of predatory lenders and the commercial debt management companies who exacerbate, rather than alleviate, financial problems. This should be done through a combination of tough, properly enforced consumer protection and ensuring financially vulnerable households have access to independent, objective debt advice. Making sure that households get this advice at the earliest stage must be a priority. Early intervention and prevention is critical.

· We have a specific concern about the new national pension scheme NEST that is being introduced from 2012. The very high debt-to-income ratios evident in the NEST target group (low-medium incomes) means they will need good advice or guidance before deciding on whether to pay down debts or auto-enrol into NEST. We urge CCCS to work with NEST and other stakeholders to ensure that the potential target group have the necessary advice and guidance if they need it.

· In the long term, the need to repay debts for longer, and the inability to build up assets and incomes will surely impact on the retirement plans of many households. We may also see an increase in problem mortgage debt amongst older retired households as the wave of over-indebted ‘baby boomers’ move towards retirement. This surely points to the need to revisit the role of equity release in helping older, income poor households.

· The absence of sufficiently granular data limits detailed investigation into household finances and their potential vulnerability to changing economic circumstances. Therefore, as with the previous report, we continue to strongly recommend that policymakers, regulators, lenders and CCCS work together to establish comprehensive databases to allow time series monitoring and analysis of household debt.

Debt and the Regions

Debt and The Regions will be the third report in the series and will be published early in 2012.

It is already clear that the effects of changing socioeconomic conditions are not being felt evenly across the UK. Large parts of the country seem to be comparatively unscathed but certain regions and local communities are badly affected.

This report will:

investigate levels of over-indebtedness in different regions;
investigate how external economic and environmental factors will impact on particular regions;
assess the availability of debt advice in the regions; and
where possible, identify regions which should be a priority for intervention.