Should the State tell you what to do with your money?

Although much of the economic talk over the past few months has been about recovery and the imminence of interest rate rises, the impact of the financial crisis and recession that followed are still being felt very tangibly by large swathes of the British population. A new report published today by the Centre for the Modern family - a think tank set up by Scottish Widows, which I've been involved in for the past three years - reveals that more than a quarter of people are in debt to a family member, with the average loan standing at over £2,100.

That’s not the whole story either. Many more people are relying on some less formal form of financial support from the Bank of Mum and Dad (or from grandparents) – with over a third of parents still helping out children long after they’ve flown the nest.

The good news buried in what might seem like bleak statistics is that as a unit, families have proved quite resilient over the past six years. Older generations won the jackpot in the property market – benefitting from a windfall in housing wealth which is unlikely to be repeated for future generations. Furthermore, those in retirement or approaching retirement are likely to be sitting on pensions that are much better than their children or grandchildren will ever have. This cushion has left them comfortably placed to provide support for the younger generations – who have been hit by a double whammy of stagnant wages and increasing costs.

Things will be different next time

But while families have proved resilient over the last few years, such a show of strength is unlikely to be repeated when the next major economic crisis hits in a generation’s time. People in their 20s and 30s today are saving less, and are mostly only managing to scrabble onto the housing ladder at all if they have a handout from their relatives.

In 30 years time, it’s improbable that this generation will have seen their properties increase in value in the way that their parents’ houses have. What’s more, they’re likely to be sitting on much larger levels of debt – paying down mortgages well into their sixties.

The children of todays twenty- and thirty-somethings are unlikely to find the Bank of Mum and Dad nearly as obliging. So if a re-run of 2008 was to hit us in 2050, the chances are that the consequences would be considerably worse.

There's still time to get on top of this. To build a self-sufficient society, more people need to buy products like income protection insurance and redundancy cover – which provide them with a safety net in the event that the bottom falls out of their financial world. As benefits are further pared back, this safety net will become more important - not in 40 years time, but in the next few years.

And if enough people begin to buy safety net insurances, it should help save the state even more on its benefits bill.

Unfortunately, people are unlikely to make such provision without encouragement - or even something stronger. People are already being automatically opted into their pension, and as of next year, those approaching retirement will be offered free guidance as to what to do with their money once they stop work.

The state needs to lead the way

The next step is for the government to start providing access to financial guidance and even advice at other times in people’s lives – finding ways to make sure that people are engaged in financial planning at the right moments in their lives. The right time to talk about the future is when people are starting a job, buying a house, having a child – but at the moment, these opportunities to engage people about preparing for the future are wasted.

I find it astonishing that the government spends millions of pounds on anti-drink driving and smoking adverts, but still does nothing to wake people up to the very serious risks of poor financial management.

Today’s Centre for the Modern Family report is another piece of research to add to the growing volumes of evidence that shows there is a big problem brewing. Policymakers should ignore it at their peril.