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.
Welfare reform is reshaping the state benefits system and people reliant on the state need to consider all their optionsBut 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.
Benefit cap
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.
Universal Credit
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).
This provides one monthly payment to a single-named person in the household and it’s all managed online. Its ambition is to simplify welfare, but some households can be waiting six to 12 weeks for support.
As highlighted by the Resolution Foundation, even when considered alongside policies designed to boost incomes, the ramp-up in welfare benefit shift to UC means that:
- 1.3m working families entitled to support in the tax credit system will no longer be entitled to any in-work support, leaving them £42 a week worse off on average;
- A further 1.2m families are set to receive the new benefit, but will be an average of £41 a week worse off;
- Only around 200,000 families who are no are longer entitled to UC at all will be overall better off following cuts to in-work support and boosts to income from the National Living Wage and income tax cuts.
Bereavement Support Payment
But that is still not everything.
A new Bereavement Support Payment system has also been introduced this year and although it’s been labelled as a ‘modernisation’ of the current system, the Childhood Bereavement Network estimates that more than nine in 10 widowed parents will be supported for a shorter period of time than they would under the previous system.
While the new benefit extends financial support to younger people without dependent children, older claimants and bereaved parents with dependents will now receive less overall.
Sadly, it’s also only for those who lose a spouse or civil partner, not cohabitees, despite the fact that 21 per cent of couples with children are not married, according to figures from the Office for National Statistics.
Consider your options
The upshot is this - welfare reform is reshaping the state benefits system and people reliant on the state need to consider all their options.
None of us want to think about the worst, but our own research shows there are an alarming number of people in the UK who are putting themselves at significant risk by failing to arrange cover for the unexpected.
Only a third have taken out life insurance and fewer than one in 10 have critical illness cover.
No matter what our personal circumstances, it’s vital for all of us to ensure we have an appropriate plan in place to protect our finances and provide the peace of mind that there’s a safety net in place.
This is an ideal opportunity to discuss all options with your clients.
For information on welfare entitlement and support, go to www.turn2us.org.uk and check out the material available from www.moneyadviceservice.org.uk
Johnny Timpson is protection specialist at Scottish Widows
