Understanding the role of liquid wealth, family financial transfers, and pensions in household insurance

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ContextHouseholds might need to save for two primary reasons: to insure themselves against adverse events, and to provide resources in retirement. While standard economic models often assume that individuals are able to make rational and well-informed choices with respect to their saving and insurance decisions there is considerable evidence that this is not the case. The extent to which this matters for wellbeing is a key academic question with important policy implications. In the UK individuals have a lot of freedom over when and how they save. The recent removal of the requirement to annuitise accumulated pension wealth gives peopl flexibility over how they draw down their funds through retirement. There is considerable concern about people's ability to make these difficult choices well, specifically that many are undersaving for retirement and that some may draw down their pension pots in retirement too quickly. Stronger evidence in these areas is urgently required in order to inform the current development of retirement saving policies, and the regulatory environment and consumer advice market surrounding pension access in retirement. Aims and objectivesWe propose a programme of research that would use large scale household survey data to produce crucial new evidence for these debates. The first strand will examine the prevalence, persistence and drivers of low liquid wealth, unpicking the relative roles of income levels, pre-committed expenses, family composition and different sources of insurance. We will examine the role such wealth has played in protecting households during the Covid-19 pandemic from financial difficulties. This will shed light on the trade-offs involved in encouraging greater saving for retirement versus policies focussed on encouraging individuals to build up a "rainy day fund". The second strand will assess the drivers and consequences of financial transfers made, during life, between generations. We will quantify the extent of intergenerational insurance of income risk within families during the Covid-19 pandemic. We will then explore the determinants of making transfers, and their effects on the wealth decumulation of givers and wealth accumulation of receivers over a longer period. This allows us to estimate the contribution of transfers to wealth accumulation amongst younger generations and wealth inequalities by family background.The third strand will provide the first comprehensive quantitative assessment of the difference the new pension flexibilities could make to profiles of retirement resources, once people's other wealth and the resources of the wider household are taken into account. We will examine individuals' intentions on how they plan to access their wealth and how the resulting income profiles compare to patterns of spending through retirement among recent generations of retirees. This research will be supported, intellectually and financially, by project partners in the public, private and not-for-profit sectors. This will help ensure that the impact of the research on policy and practice is maximised. Our objective is not just to produce valuable evidence, but also to ensure that evidence is known of, understood and learnt from. Applications and benefitsThis research relates to important public policy issues and will be of direct use to policy makers and practitioners in the public, private and not-for-profit sectors. We anticipate the evidence produced by this research programme being of direct use to: policy makers considering whether and how to encourage additional retirement saving; private sector providers designing financial products; policy makers, regulators, and the consumer advice market concerned with making sure that consumers are appropriately supported with the financial decisions they make. Through impacts such as these the research will improve the welfare of individuals and therefore be of considerable social benefit.