Two million households are living on a financial knife-edge, susceptible to an economic downturn, a Financial Services Authority (FSA) survey has suggested.
The FSA is worried by poor consumer financial knowledge
A further half million households are already having difficulty paying bills and meeting debts, the report found.
The FSA identified a lack of consumer knowledge, particularly amongst the 18-40 age group, as key to low levels of saving in the UK.
The FSA pledged £10m this year to boost financial knowledge amongst consumers.
Largest survey ever
Academics at Bristol University, on behalf of the FSA, quizzed more than 5,000 consumers about their personal finance know-how, the largest survey of its type ever conducted.
The survey results revealed an alarming lack of knowledge amongst consumers.
Some of the key findings included:
- Half a million households are in serious financial difficulty, even in current benign economic conditions
- Most Britons are good at making ends meet but not so good at saving for the future
- Seven out of 10 consumers have no savings in place to see them through a sudden drop in income
- 42% of working age adults do not have a personal or workplace pension, yet 81% recognise that the state pension will not be enough for them to enjoy a comfortable retirement
- Four out of 10 consumers who have an equity Individual Savings Account are unaware that its value can fluctuate with stock market performance.
Part of the FSA's remit is to promote financial education amongst consumers.
The survey suggests that it is amongst younger people that the FSA faces its biggest challenge.
"There is a real problem amongst the young," John Tiner, FSA chief executive, said.
"Today's 18-40 year olds are faced with greater challenges than were faced by their parents...the cost of not having the necessary skills to make sound financial decisions is becoming increasingly significant.
"We have to find new innovative, creative ways to grab the attention of young people," Mr Tiner added.
Over the next five years, at an estimated cost of £10m a year, the FSA plans a series of initiatives to boost personal finance knowledge, particularly amongst the young.
Pupils in 4,000 secondary schools will receive lessons in managing money and students in higher education will have access to debt and financial advice.
Younger people are being targeted by the FSA
Some large employers are to hand out financial information packs to their workers, while new and prospective parents are to receive a Money Box pack, containing details of the government's child trust fund and subsidised nursery places.
In total, the FSA aims to help 10 million Britons with managing their money.
As part of the initiative the FSA and the BBC News website joined forces last year to develop a Financial Healthcheck and a Debt Test.
They are currently available on the BBC News and FSA websites, but will soon be syndicated as widely as possible.
The FSA plans to conduct mass consumer surveys every four years to see if its measures are improving financial know-how.
"We don't expect to see a dramatic jump in financial capability... just a steady improvement," Mr Tiner told BBC News.