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Good afternoon and welcome to this week’s Home Front. Does this Labour Government contradict itself? To paraphrase the American poet Walt Whitman, very well then, it contradicts itself.
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.
Why, then, you might reasonably ask, are they also penalising low-income families who do the right thing and try to save money?
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.
Labour has done nothing to change this, even though the amount has remained frozen for years and does not reflect the kind of safety net that low-income families today might need and want to save.
There’s something quite Victorian about the way that capital thresholds enshrine and uphold moral judgements on benefits claimants.
People who claim benefits are often demonised for being feckless and bad with money (even though this is rarely the case), but anyone who has savings above £6,000 will see their entitlement tapered off until it disappears entirely if they save more than £16,000.
How the savings cap impacts people who claim benefitsIt 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.
According to a new report from the independent think-tank, the Resolution Foundation, 830,000 families faced a partial reduction in their universal credit entitlement, while 1.2 million saw it wiped out entirely.
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.
These rules are perverse and create a poverty trap.
Consider how nonsensical they are:
Imagine you’re a mother of two working a zero-hour job in a care home. You’re just about managing to pay your rent, feed your children, and, over time, you’ve saved some money. Suddenly, your relationship breaks down, and the father of your children moves out, leaving you to pay rent alone. You’re denied universal credit because you’ve managed to save some money, so you use your savings to pay rent until they run out, and then, you claim universal credit.
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.
Forcing a family to give up their savings before they can access the welfare safety net is twisting people’s arms until they make a Faustian bargain in which they trade their financial security and ability to accrue wealth for access to benefits which they may otherwise have only needed temporarily.
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.
If the savings limits for universal credit had been uprated in line with prices, support would be tapered from £10,000 instead of £6,000 and cut off at £27,000 instead of £16,000 this year, the Resolution Foundation says.
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.
Alex Clegg is an economist at the Resolution Foundation. He explains that “the way capital is assessed in the benefit system undermines other well-intentioned government policies to encourage people to save.”
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.
“Similarly,” Clegg adds, “lifetime ISAs are designed as long-term savings vehicles to support aspiring first-time buyers, but the universal credit rules require families to use money saved in them before claiming benefits, even though there are charges for early withdrawals.”
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.”
Exempting money saved through Help to Save and Lifetime ISAs would empower low-to-middle-income families to achieve long-term financial goals, such as buying a home. This would reduce the likelihood of them needing state support in the future.
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?
As conversations about welfare reform continue to rage on, it’s worth us thinking about the purpose of the welfare state full stop.
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.
However, according to the Resolution Foundation, nearly one-in-eight (12 per cent) universal credit recipients who can afford to save refrain from doing so to retain their benefit entitlement.
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.
This week, I’d like to draw your attention to the nuanced nature of what’s going on in Britain’s mortgage market. You’ll see lots of headlines celebrating falling mortgage rates, but it’s not that simple.
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.
Please do have a read here and let us know what you think.
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.
Now, it’s true that some property management companies certainly engage in some creative (shall we say) accounting when it comes to service charges. So, I’d encourage you to check every single line of detail.
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.
If you’re worried about your service charge, I’d encourage you to ask questions, ask for receipts and challenge every single line of your bill until you’re satisfied.
Send in your questions to: @Victoria_Spratt, on X, formerly Twitter, @vicky.spratt on Instagram or via email [email protected]
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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