Photograph: Andrew Parsons/PA
George Osborne’s U-turn on the controversial tax credit cuts came as a welcome relief to the poorest families. Although he offered no similar reversal on universal credit, which could see a drop in income of £1,000 a year for working households in 2020, the government hopes the new benefit system will both improve financial inclusion and encourage more people into work.
Universal credit combines six core benefits and tax credits into a single payment made monthly into a nominated household bank account. Everyone in receipt of universal credit will need a transactional bank account, and the government hopes that monthly payments will help people develop the mindset of budgeting on a monthly basis, as they would need to do once in work.
Despite some reservations, James Browne, a senior research economist at the Institute for Fiscal Studies (IFS), welcomes the scheme’s simplicity: “It makes the system easier for claimants to understand. It makes it easier for people to move into work and to change the benefits they’re claiming.”
To make transition easier, the major banks have agreed to create a new basic bank account with no fees, only available to customers who don’t qualify for other accounts. The Department for Work and Pensions (DWP) has set up a system of universal support in certain trial areas in which job centres and local authorities provide coaching to those most likely to experience problems. That includes offering access to debt management advice and credit unions.
The DWP’s research shows that claimants have so far responded positively to the new system and are more likely to be in work than those in receipt of jobseeker’s allowance. But it’s early days: universal credit has been rolled out only in some parts of the UK, and principally to single people making a new claim – the most straightforward claimants. (Roll-out won’t be complete until 2017.)
Nigel Keohane, research director at the Social Market Foundation (SMF), says that in theory, there are some advantages to receiving benefits monthly: “If you’re paying bills, often the best deals are if you’re paying by direct debit, and typically those are taken monthly.” It also gives some opportunity for economy of scale in making bigger purchases.
But there are concerns that universal credit may make financial inclusion harder to achieve. Keohane notes that about 40% of people in the lowest two income quantiles are paid weekly, so receiving benefits monthly doesn’t mirror the way they would budget once in work. SMF research found that most households whose members were out of work preferred to budget weekly, or even daily.
Budgeting monthly can present a challenge, says David Simmons, a welfare rights adviser with the Child Poverty Action Group (CPAG): “If somebody gets a lump sum and they’ve got some big pressing need, like paying off particular debts or buying a new cooker, they may run out of money.” Simmons is also concerned about the decision to pay universal credit to a single member of the household, potentially making other members financially vulnerable.
It may be optimistic to assume that people with low incomes will start using bank accounts in the way intended. Chris Goulden, head of policy and research at the Joseph Rowntree Foundation, points out that many poorer people with bank accounts “take the money out and use cash anyway rather than some of the functions”. He says this is a rational response to bank charges on, for example, direct debits that don’t go through or unplanned overdrafts. While the government is encouraging claimants to manage money through jam-jar accounts, which ringfence sums of money for different areas of expenditure, such as rent and bills, Goulden argues that such accounts remove essential flexibility.
Curo housing association in Bath currently has 150 tenants receiving universal credit, and has surveyed them about their experience. The first difficulty, says Sarah Seeger, head of customer accounts at Curo, is the six-week wait that many claimants face at the start of the claims process before receiving any money: “Many are either working part-time or have been on zero hours contracts, and so they haven’t got that nice month’s salary to see them through those six weeks.”
Of the tenants surveyed who found themselves in this position, 90% coped by borrowing money from family and friends. While some have been able to take an advance on payment, it has to be paid back within six months, and, says Seeger, under-25s on job seekers’ allowance find it almost impossible to pay back the advance as well as their rent and utilities bills. Goulden is concerned that claimants having to wait for the initial payment, and without access to mainstream credit, will turn to subprime lenders.
One of the areas most likely to cause problems is that housing benefit is now paid to tenants rather than directly to landlords. The SMF research found that tenants themselves preferred the money to be paid to landlords, and, among the Curo tenants, four-fifths are already in rent arrears, largely because they have unpredictable incomes. The government has now made it possible to revert to a direct payment if tenants fall into rent arrears for two months or more, and many of the Curo tenants have done this.
It seems all too possible that attempts to impose a traditional model of prudent financial management on people with very low incomes will prove an uphill task. As Seeger says: “People who are on a low income don’t have much wiggle room so it doesn’t take much to go wrong to really set them on the back foot.”
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