The sidecar savings model enables people to put money aside into both their pension pot (illiquid retirement savings) and a liquid account, via payroll deduction. Imagine it as two jars of money. One is locked up and invested for the long term, and the other is accessible for savers should they need some emergency liquid savings.
To use it, savers would need to contribute an amount over and above the minimum level set for auto enrolment. This money would then be split between a liquid sidecar account and a pension pot, with the additional contributions initially flowing into the liquid account. When the liquid balance reaches the savings cap, all contributions roll into the pension pot. If the saver then takes cash out, the additional contributions would once again top up the liquid account until the threshold is reached.
The sidecar savings model offers a number of potential benefits:
1. Helps savers build short term financial resilience
The sidecar model enables savers to build up a pot of accessible savings. This means, if a high or unexpected cost arises, they’ll have some money to hand to help them cover the expense. This helps make them more financially resilient and less likely to need to borrow money via credit cards or loans, which can be costly.
We also know from our research that a lack of short term savings can be a significant cause of stress and anxiety. Having some money put to one side in a sidecar account could help give people peace of mind.
2. Potentially increase retirement savings
By contributing over and above the minimum level for auto enrolment, this model enables savers to preserve the level of auto enrolment contributions going into their pot, whilst potentially increasing the amount they save for retirement if the liquid savings cap is reached.
So, why would we not simply place more money directly into our pension pots instead? People tend to be more comfortable with saving for the short term than saving up for something that’s in the distant future. The sidecar model is an attractive way of saving more for later life because it keeps some of those additional contributions accessible in case they’re needed.
3. It’s a hybrid product, designed to fit more closely with the way people manage and use their money
The sidecar model is a type of hybrid product. Rather than having a separate pension pot and liquid account, this hybrid product combines the two, managing the flow of money in a smarter way. This helps to create an optimal balance of shorter and longer term savings for each individual saver.
4. Utilises the idea of set and forget to build up savings
A saver using the sidecar model would contribute each month via payroll deductions. This creates a stable flow of contributions.
Some savers we spoke to in our focus group interviews said that they liked the idea of having it done for them, in the sense that savings contributions would be automatically deducted from their salary. This was seen as a key benefit. People thought it would help them with budgeting because it would limit the amount of money available for them to spend in their bank account.
5. Saving for an emergency could result in higher engagement
Finally, the sidecar approach might work better than simply encouraging individuals to save into an existing or standard banking product. This is because of the psychological component of labelling the sidecar account as being for emergencies. Previous studies have shown how classing sums as emergency savings can significantly reduce the extent to which they’re drawn upon for non-emergency purposes. This has also proven to be the case among low income workers, which supports the idea that the sidecar model can be adopted by people with various saving habits and earnings.
While different types of payroll deduction savings models have been offered in the past, we’re not aware of research-led trials that have systematically sought to assess whether these benefits are realised in practice. That, and testing the broader workability of the concept, is the purpose of our two year trial, working with the Behavioural Insights Group at Harvard.
Do you think the sidecar model would be worth considering? Are there any additional advantages or disadvantages you consider the model to possess?
Will Sandbrook, executive director of NEST Insight