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Sir Keir Starmer’s Government wants to encourage more people into work to cut the state’s benefits bill. They have also pledged to increase homeownership.
In 2013, the Lib-Dem-Conservative coalition government introduced a little-discussed rule, which is known as the capital limit for universal credit. This rule states that if you have capital, including savings or investments, of £16,000 or more, you are not eligible for universal credit if you fall on hard times.
There’s something quite Victorian about the way that capital thresholds enshrine and uphold moral judgements on benefits claimants.
How the savings cap impacts people who claim benefits
It is believed that around two million families with an average household income of only £15,700 who are eligible for universal credit could have been affected by these capital rules since 2020-22 when the number of people requiring benefits rose significantly.
For example, a family entitled to £750 a month in UC (based on income alone) would have their entitlement reduced to £576 if they had £16,000 in savings – but it would drop to zero if they saved a penny more.
Consider how nonsensical they are:
Once, you had the beginnings of a house deposit that would have moved you and your children out of the precarious private rented sector. Now, you’ve got universal credit, but you’ve been compelled to let your savings go.
The Resolution Foundation has found that the number of people affected by these rules is growing. In 2006-08, only one-in-three families in the UK (35 per cent) had savings greater than £6,000, but by 2020-22, that had risen to nearly half (46 per cent). This is to be expected for two reasons. One is inflation and wage increases since the early 2000s. Two is that more people claimed benefits during and after the pandemic, so it’s reasonable to expect that a number of them would have had pre-existing benefits if they’d never claimed before.
These rules were intended to make sure that people used their own resources before seeking state support, but, in reality, they are creating a negative feedback loop, which makes it very difficult for people on low incomes to escape hardship by creating a financial buffer for themselves.
For example, the Government encourages families on universal credit to save through the Help to Save scheme, but money saved in these accounts can reduce their benefit entitlement.
Clegg argues that these government-backed savings schemes should be exempt from the universal credit capital rules to give “low-income families the potential to build up meaningful savings.”
Added to that, uprating the current capital limits with prices from 2026-27 onwards (which the Resolution Foundation estimated would cost £135m in 2029-30) would prevent the system from becoming increasingly punitive over time and could help reduce the benefits bill long-term by helping people to support themselves.
What is the purpose of welfare?
It was established to support anyone who fell on hard times and prevent the suffering caused by abject poverty. These rules risk undermining that intention by providing support that is conditional on people running down their savings and putting themselves in a precarious position to access support that we are all, in theory, entitled to because we pay national insurance contributions.
If Labour is serious about homeownership and welfare reform, if it means what it says about encouraging people to try work and about making the benefits system fairer, then this Government should stop penalising people who might need help for a period of time due to unforeseen circumstances such as a rent increases, an illness or a relationship.
Along with my colleague Callum Mason, I’ve looked at why lower mortgage rates should be approached with caution: they are a sign that the markets are pricing in recession. We’ve also spoken to experts who warn that relaxing mortgage lending regulations could cause a house price spike.
Ask me anything
This week’s question comes from a reader who wants to know “whether it’s fair” that the service charge has gone up for the flat they own in a small block.
However, in this reader’s case, the increase was driven by an insurance premium. Sadly, having just sorted out buildings insurance for my own block of flats, I can confirm that it is more expensive to insure a building than it used to be because inflation means the cost of rebuilding a block of flats should it burn down or fall down (God forbid) is more expensive than it was a few years ago because raw materials and labour cost more.
Send in your questions to: @Victoria_Spratt, on X, formerly Twitter, @vicky.spratt on Instagram or via email vicky.spratt@inews.co.uk
Vicky’s pick
I’ve been reading Why We’re Getting Poorer by Cahal Moran. Cahal is a fellow at the London School of Economics, and his book provides an interesting analysis of what is and isn’t working about our current economic system and the widening inequality it is engendering.
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