We all know that the government is under pressure to reduce the cost of the welfare budget to a level which the UK economy can afford, but the worrying reality is that millions of households still believe they can rely on the state or family help if they’re unable to work due to illness or injury.
This effectively means that many people have no realistic financial safety net in place to deal with an unexpected loss or reduction in income.
There are a lucky minority who will continue to be paid by their employer, but most families will be unable to cope with any unexpected financial shocks. And while some can rely on savings, many others can’t, with almost half of UK households having savings of less than £1,500, according to Scottish Widows research.
Financial protection can feel like an awkward topic for advisers to broach with their clients, but the sheer volume of recent benefit changes means that now is an ideal time to start the conversation with them about financial resilience.
To put things into perspective, let’s have a quick rundown of the most recent changes.
Support for Mortgage Interest
Top of mind is Support for Mortgage Interest (SMI), the safety net which has underpinned mortgaged homes across the UK for nearly 70 years. Worryingly, however, it’s the only back-up in place for many families if they were unable to pay their home loan.
We’ve already seen the waiting time for this benefit increase from 13 weeks to 39 weeks, which could be too late for many if they have no other savings to rely on.
But from 5 April next year, SMI will become a conditional loan with a charge being taken on the property and homeowners having to pay back the amount of mortgage interest paid for them, either when they return to work or when they sell their home.
SMI loan support will be conditional on the mortgager and/or their partner not being in receipt of ‘earned income’ – there will be no support if they are.
Taking out a mortgage is the biggest financial commitment many of us will ever make, and these changes provide a timely opportunity to broach an appropriate financial protection conversation with your clients, both old and new.
Let’s look now at the benefit cap which sets a limit on the total amount in benefits that most working-age people can claim.
This has recently been reduced to £23,000 a year per individual household in London and £20,000 in the rest of the UK.
It’s designed to ensure that no family on benefits can claim more than the net income of the average working family.
But analysis last year by the Chartered Institute of Housing showed that the new lower benefit cap was likely to impact 116,000 households with between one and four children.
In addition, we’ve seen benefits, including child and working tax credits, income-based job seeker’s allowance, income support and housing benefits (which are frozen until 2020) being replaced by the means-tested Universal Credit (UC).