The extended household benefit cap, due to be introduced this autumn, is set to take an average of £60 a week out of the incomes of affected households, government analysis shows. The existing cap is saving £185m a year and the new one will save an additional half a billion a year by 2020, according to the Treasury.
The new cap will reduce the total amount an individual household can receive in benefits to £23,000 a year in London (£442 a week) and £20,000 in the rest of the UK (£385 a week). It replaces the existing cap level of £26,000. The Department for Work and Pensions (DWP) says that it could act as an incentive for those relying on government support to move into full time employment, because getting a job automatically exempts them from cap penalties.
The change is designed to ensure that no family on benefits can claim more than the net income of the average working family. But anti-poverty campaigners say that it could damage the life chances of hundreds of thousands of children, and limit the amount of money which families who are already struggling can spend on food, fuel and clothing. Around 61% of those affected will be female lone parents.
My additional worry is the reduced financial resilience of the families who rely solely on the welfare state with no other protection in place. To put things into perspective, the working age welfare benefits covered by the cap are – Child Benefit, Child Tax Credit, Housing Benefit, Incapacity Benefit, Income Support, Job Seeker’s Allowance, Employment and Support Allowance (except support group), Maternity Allowance, Severe Disablement Allowance & Bereavement Benefits. As Job Seeker’s Allowance and Employment and Support Allowance are capped by default, Support for Mortgage Interest is as well.
That’s quite a list. Especially when you consider the number of households with no alternative financial backup plan.
Our own Scottish Widows research shows that UK households are already in danger of a financial struggle due to lack of preparation for the unexpected, with less than a third having life insurance, and just one in ten having critical illness (CI) cover. Women with dependent children, who are set to be affected most by the cap, are particularly at risk. Many of them don’t consider having insurance a necessity, with 15% saying they don’t rate having CI cover as a financial priority and 13% thinking it’s a waste of money. More than one in ten (13%) women with children simply think they don’t need cover.
Furthermore, existing financial pressures have caused women to deprioritise financial protection. Almost half (47%) don’t think they can afford life insurance, and a further 39% admit they can’t afford CI cover. Twenty eight per cent say they have resorted to selling items online and 30% say they have avoided turning the heating on in winter in order to save money, showing the demands put on their finances already.
It’s really worrying to see such a high proportion of women having to take a gamble with their financial security because of other money pressures, particularly given so many families have little in the way of backup funds.
While none of us ever want to think about the worst, our findings show that there are an alarming number of households who could face a significant financial struggle in the event of an unexpected loss of income due to serious illness or death.
But even a tiny amount of protection is better than none. As an industry we need to find better ways to show the critical role which protection insurance plays in safeguarding the financial welfare of our families.
The advent of the household benefit cap makes it more important than ever for people to review their financial protection needs and seek advice to make sure their household is covered. To aid you with engaging your clients, check out the support available from the Seven Families Project at www.7families.co.uk and especially the “how finvincible are you?” quiz on Facebook.