Working families could become ‘second class savers’ under Universal Credit

Pages-from-UCWorking families moving onto Universal Credit could become ‘second class savers’, with any money put aside potentially counting against their benefit entitlement, according to a new report published today by the independent think-tank the Resolution Foundation.

Making it work – the final report of a nine-month review of Universal Credit (UC) led by a panel of experts – is supportive of many of the principles behind the UK government’s flagship welfare reform programme, particularly its improved incentives to work and the merging of six benefits into one.

But it warns that UC also contains many flaws – including the unfair treatment of savers – which need to be addressed before millions of people start moving onto the new benefit system.

In the current tax credit system, the treatment of income other than earnings depends on whether families are working or not. Savings and other income sources – such as occupational pensions, maternity allowance and maintenance payments from ex-spouses – are treated more harshly for out-of-work families than for those who are in employment.

But under UC, the harsh treatment of income will be extended to working families. Every £250 of savings over £6,000 will reduce their entitlement by £4.35 a month, while people with £16,000 of savings or more will be unable to claim in-work support at all. Income from other sources such as pension, spousal maintenance and maternity allowance payments – will all result in a pound-for-pound reduction in a households’ benefit entitlement.

The Foundation warns that this could deter many low-income working families from putting money aside and planning ahead. It adds that penalising UC recipients who want to save is particularly unfair given the government’s recent £1bn commitment to provide greater flexibility for ISA savers and encourage saving through a tax-free allowance, a policy that will mainly benefit wealthier households.

The report proposes addressing the unfair treatment of low-income savers by excluding ISAs from the UC calculations, which it estimates will benefit around 200,000 working families. It will also call for other sources of income – such as pensions and maintenance payments – to be treated in the same way as earnings.

The report also calls for maternity allowance to be treated equally to statutory maternity pay. This small change in the benefit system would make a huge difference to around 50,000 low-income families with young babies by offering them vital extra financial support.

David Finch, Senior Economic Analyst at the Resolution Foundation, said: “Universal Credit is in many ways a big improvement on the current benefits system. But there are also serious flaws in the new system that must be ironed out before millions of people move onto the new system.

“The harsh treatment of savings in Universal Credit will turn many working families into ‘second class savers’ – penalising them financially for doing the right thing and putting some money aside for the future.

“The undermining of saving for working families on low-incomes is particularly unfair given that the government has committed around £1bn in tax-relief to encourage other people to save, many of whom will be far wealthier than families receiving Universal Credit.

“The government should encourage all households to save when they can, irrespective of their income, and should end the unfair treatment of savers on UC.”

Councillor Mike Holmes
Councillor Mike Holmes

Meanwhile, Renfrewshire Council has warned that claimants could wait several weeks for their first payment, causing fears people will be pushed into debt, when Universal Credit is rolled out in the region this month.

The method of paying benefits in one payment has taken longer than anticipated to be implemented, and only people on Job Seekers Allowance will initially be affected in Renfrewshire when the change takes place on Monday, June 22, for 18 to 60-year-olds.

Renfrewshire Council’s depute leader wants local people to be aware of the changes the new benefit will bring.

Councillor Mike Holmes, who also chaired the Renfrewshire Tackling Poverty Commission, said: “We recently wrote to the UK government for clarification about the job seeking rules for Universal Credit and the impact these could have on benefit sanctions if conditions set are particularly difficult to meet. Paisley has the highest number of sanctions in the West of Scotland and we need to know this won’t get worse.

“Universal Credit claimants will be given their housing benefit directly – whereas previously it went straight to their landlord to cover their rent. This means many people will now have to cope with making the transfer themselves to make sure their rent is paid.

“Those who apply for the new benefit will also have to wait for up to 5 weeks for their first payment and I’m concerned about how people will cope with this. In these cases, residents should ask their work coach for a benefit advance to bridge any gap.”

The council has set up a dedicated phone number for residents about Universal Credit on 0300 300 1433.

@resfoundation

@RenCouncilNews

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