Tens of thousands of low income pensioners at risk of losing crucial fuel poverty support

 

If you reached retirement age after 6th April 2016 you will receive the “New” rather than the “Old” State Pension.

On the face of it, the deal looks great for those entitled to just the Basic State Pension – rather than being worth £122.30 per week (when paid in full), the New State Pension (NSP) is £159.55 – £37 per week more. Who wouldn’t want that?

Well, for those on a low income and in receipt of the Old State Pension, the level of retirement income is set by the value of “Pension Credit” rather than the State Pension. Pension Credit guarantees low income pensioners a top-up of the value of their State Pension to £159.35. This means that those receiving the Old State Pension at a rate of £122.30 can receive a top-up of £37 per week.

For those on the New State Pension who are getting £159.55, their income is 20p per week higher than the Pension Credit minimum income guarantee – so they don’t get any Pension Credit.

Okay, so overall for this group, the New State Pension might not be worth much more – but they are getting basically the same as those on the old State Pension. Not looking like such a problem – yet.

Pension Credit and Fuel Poverty support

There the story should perhaps end – lots of low income Pensioners shifted off Pension Credit through receipt of the New State Pension. Not left much better off, but no worse off either.

Except that Pension Credit provides access to other support – and in particular, support with home heating costs in the winter.

Those in receipt of Pension Credit Guarantee are in the so-called “core” group for the “Warm Home Discount” – a £140 discount on their energy bills. This means that they will get the discount automatically deducted from their bills.

Whilst there is a broader eligibility group, the provision of the discount to people in this group is at the discretion of the supplier, and comes from cash limited funds.

People in receipt of Pension Credit (including those just receiving an additional “savings” component of the benefit, which is paid to people on account of having saved towards their retirement) may also receive Cold Weather Payments of £25 per week in periods of cold weather – measured as temperatures falling below zero in your local area for seven consecutive days.

How many people might lose out?

DWP statistics indicate that there are around 1.5 million Pension Credit recipients receiving guarantee credit (with or without an additional “savings” component which is paid to people on account of having saved towards their retirement) with an additional 300,000 receiving savings credit only.

DWP analysis[1] suggests that in 2020 around 8% of those reaching state pension age after the introduction of the new State Pension would be entitled to Pension Credit guarantee under the old system: as a result of the introduction of the New State Pension, this is expected to be around 7%.

Based on around 3,500,000 people reaching pension age between the introduction of the new State Pension in 2016 and 2020, this would mean a reduction in the number of low income Pensioners receiving Pension Credit (guarantee) – and as a result pushed out of automatic entitlement to the Warm Home Discount – of around 35,000 at the end of the decade.

As mentioned above, Cold Weather Payments are not only paid to those receiving the “guarantee” component of Pension Credit but also to those receiving the “savings” component. The latter part of Pension Credit is being scrapped altogether with the New State Pension. This means the number who could be affected is likely to be considerably larger. DWP estimates suggest that, under the old system, in 2020 around 14% of those reaching pension age after the introduction of the new State Pension will be entitled to some form of Pension Credit (including savings credit), under the new State Pension this reduces to 7%. This would represent a fall of around 245,000 pensioners who could be entitled to a cold weather payment to help them through a period of freezing weather at the end of the decade.

Since the NSP was introduced in April 2016 thousands of low income pensioners will have been excluded from entitlement to one or both of these benefits already.

The impact on Housing Benefit and Council Tax Benefit

Loss of entitlement to Pension Credit also has wider implications as well. In particular, receipt of the Pension Credit Guarantee ensures that you are entitled to receive full Housing Benefit and Council Tax Reduction as well. Those on a low income not getting Pension Credit guarantee may still be entitled to receive these benefits, but will need to undergo an additional means test in order to do so.

What’s the solution?

One solution would be to set the level of the new State Pension slightly below that of Pension Credit so that someone receiving the full Pension, but who had no other income, would be entitled to receive Pension Credit (and as a result the associated benefits). Those with additional income (for example, from a private pension), would be excluded from entitlement as they would have been under the old State Pension.

Another alternative would be to “taper” new State Pension entitlement against Pension Credit, so that, only a portion of the value of the Pension is deducted from the value of Pension Credit someone can receive.

Regardless of the solution, we should remember that, these claimants are not getting significantly more money receiving (only) the New State Pension than those not receiving a full state pension because they haven’t (for whatever reason) paid sufficient National insurance Contributions over the course of their working life. This risks leaving them worse off overall on account of their pension, as a result of losing fuel poverty support (and potentially other assistance). It cannot be right that those who have paid contributions in order to earn a Pension risk ending up worse off as a result.

Rebuilding and transforming the social security system

 

First published on the Fabian Society website at http://www.fabians.org.uk/more-than-a-safety-net/

There is always a temptation to think that benefits only exist to provide a safety net against poverty. Whilst it should pull us apart with shame that there is still poverty in Britain, I find this a depressingly unambitious way of thinking about social security – like thinking about the health service as if it was just A&E.

In my book “Broken Benefits” I talk about another goal which is equally important – to correct for inequalities which cannot be addressed through the labour market.

A single mum with a disabled child, isn’t going to be paid any more by their employer on account of their circumstances. Nor should they be. The world of work would be incredibly complicated if pay had to be adjusted to people’s individual circumstances. This is not a problem which can be resolved through increasing pay.

But the magic of social security is that it can step up to the challenge of equalising incomes between households with different compositions. Tax Credits and Child Benefit can pay extra to take account of the additional costs of the child, Disability Living Allowance to recognise the additional costs of the child’s disability.

This isn’t about whether or not the family are living in poverty – this is about basic fairness – about social equality. She could be earning £8000 or £30,000, she would still face additional costs over a co-worker without children.

This misconception of the role of the benefits system can lead to misunderstandings about how best to fix it. For example, some think that the key question is how to increase pay to the point where we no longer need benefit top ups (at least for working claimants). A much better question to ask is how the benefit system can be effectively integrated with the labour market, in order to provide financial support alongside and as a supplement to earnings for those with higher levels of need.

Instead, and increasingly over recent years, the benefits system has been made less flexible, less able to respond to differences in need.

For example, one group which clearly have a higher level of need which cannot be met through employment is disabled workers. Often people with disabilities face higher costs of working, and the disabled worker element of WTC played a key role in addressing this.

However, for disabled workers on Universal Credit, this support has been reduced or removed. It was intended to be replaced through the payment of a limited capability for work element paid in work, and through an enhanced work allowance for disabled people – but the first was scrapped when the Government got rid of the ESA Work Related Activity Component, the second is not paid to disabled parents.

Another area where different people clearly face different levels of need is retirement. Different groups can face very different life expectancies, and so some flexibility in the age of retirement is also needed as a result. Until 2010 some of this flexibility was built into the benefits system since those on a lower income (both men and women) could receive Pension Credit – which provides a retirement level of income – from the age of 60.

Since 2010 the Pension Credit entitlement age has been rising in line with the Pension age for women – so that by the end of the decade it will have reached 66. As a result the number of over 60s on out of work sickness or unemployment benefits has soared – to 350,000. It is simply not right that those on the lowest incomes have been seeing their retirement age rise the fastest.

This situation is made worse by the treatment of mixed age couples under Universal Credit. In the new system if one partner is over state pension age and the other is under, they are both effectively treated as being of working age – and given no more than a working age benefit entitlement as a result.

A typical couple with one partner over pension age and the other under face losing around £10,000 per year by 2020 compared to 2010, principally because of this measure.

We cannot eliminate poverty in Britain without an effective social security system, but it can do so much more. It is often said that a system for the poor tends to be a poor system. This is exactly the direction in which recent policy – and the rhetoric of moving to a low tax, low welfare economy – has been driving our social security system.

So lets transform social security to build a system which doesn’t see benefits as simply a necessary evil to top up low pay, but instead to create something which works in harmony with the labour market to make family resources relate more closely to their individual household needs, rather than just to a worker’s value in the labour market.

A pain in the assessment period

 

A couple of weeks ago there was a lot of media attention on analysis which found that many claimants paid weekly were at risk of receiving a reduced award of Universal Credit in December because of receiving 5 pay packets rather than the usual four.

Calculating how the time at which payments of earnings are made affect Universal Credit is complicated – this blog has a look at this issue in a little more detail.

How does means testing work in Universal Credit?
Well, the first thing to note is that pay is not calculated by the calendar month, it is calculated based on an assessment period of a month which may start and end at any point in the month (so, for example, an assessment period may start on the 12th November and run to the 11th December).

Any earnings (after tax) paid to the claimant during this period count towards the assessment of their Universal Credit entitlement at the end of the assessment period.

To calculate their actual Universal Credit entitlement, an amount of their earnings equivalent to their work allowance is ignored, then 63% of the remaining earnings are deducted from their Universal Credit entitlement. So, for example:

Simon has an assessment period running from 12th November to 11th December. On the 29th November he receives his net monthly earnings of £600. After 11th December, his earnings in the assessment period are totalled (simple in his case as he only received one pay packet).

He has a maximum Universal Credit entitlement of £450 and a work allowance of £192. 63% of £408 (£600-£192)is deducted from his maximum Universal Credit entitlement, leaving him with £193 Universal Credit.

The decision to make all earnings count towards the single payment period in which they are paid, creates problems for a number of different groups:

  1. People who do not get a regular monthly pay packet

Let us suppose that instead of receiving £600 per month, Simon receives £150 per week paid every Friday. Well, in some assessment periods Simon will receive four pay packets (£600), and in other periods he will receive five (£750)

In the months where he is paid £600 his Universal Credit entitlement is £193. In months where he earns £750 this reduces to about £98.

In some respects this isn’t a huge problem – overall some people will be a bit better off, others a bit worse off (depending on whether the reduction in earnings means they don’t use up all of their work allowance in some months, or whether they are pushed out of entitlement altogether in months where they receive five payments.) However, it does create instability and uncertainty of income. For many people on a low income – who, despite much of the rhetoric, are often extremely good at budgeting (because they have to be) changes in income from one month to the next can cause huge problems.

The problem is likely to be greater for claimants paid four weekly, where in one month each year they will be treated as having eight weeks of pay in a single month (there are thirteen periods of 4 weeks in one year). This is likely to substantially reduce their entitlement in those months – causing substantial irregularities in their overall income. If they aren’t expecting it, the substantial reduction of income in those months could cause them real problems with effective budgeting.
 

  1. People with irregularities in their pay

A second problem can result from irregularities in pay. For example – last year I was paid on the 29th November and the 21st December (it is common for December earnings to be paid before Christmas).   If my assessment period ran from the 27th November to 26th December and my pay dates were recorded as 29th and 21st – then I would receive two monthly payments of earnings in a single assessment period.

Were this to be the case, I would be treated as having double pay for one month’s Universal Credit, and then no pay the following month.

This clearly causes a great deal of income instability (I may get no Universal Credit just after Christmas, and then more than usual the next – despite my actual earnings not changing).

It could also cause a claimant to lose out heavily because in the second month when they are treated as having no income they gain nothing from the work allowance so they only use one work allowance over 2 months.

For example let’s suppose I have a maximum Universal Credit of £800, and a work allowance of £397 and my net earnings are £600 per month.

If I was treated as earning £600 per month, then I am £203 over my work allowance and see a £127 deduction from my maximum Universal Credit entitlement. Overall my income (including pay plus UC) is £1273 per month – or £2546 over the two month period.

However, if I am treated as earning £1200 in one month and nothing the following month – then my overall income is £894 in the first month and £1400 in the second. Over the two month period this leaves me around £250 worse off, simply on account of having two pay checks in one assessment period (though perhaps the bigger problem is the huge instability in income this causes me).

And for some it will be even worse because if their maximum entitlement to UC is higher than the benefit cap the UC they receive may be subject to the benefit cap in the second month (because they will be seen as having earned nothing). This is despite them having been in regular fulltime employment and their earnings from a month’s work – if counted for that month – being such that they would exclude them from the cap.  (Claimants may not be affected by this if they were in work – and earning enough to be exempted from the benefit cap – for each of the previous 12 months.)

  1. People leaving employment and claiming Universal Credit – removal of the waiting days will mean some people wait 9 weeks instead of 5

Another problem caused by the way pay is treated in Universal Credit can be caused when claiming Universal Credit as a result of having left employment. In such a case, if your final pay packet from employment is paid after the start of your first assessment period then these earnings will count towards your entitlement at the end of the first month.

If the claimant had been paid monthly, the result of this is that they are likely to be pushed out of entitlement altogether for the first month of their claim – and, instead of waiting five weeks for their first Universal Credit payment, will have to wait nine weeks instead.

Somewhat ironically the Government’s decision to scrap the Universal Credit waiting days will make this problem much worse Currently if the employer pays the final wages in the 7 days after leaving employment and claiming UC their final earnings wont usually decrease their UC unless they are very high as they wont fall into their first Assessment Period.

Once the waiting days have gone any income they receive after their claim will reduce their UC payment that will be made 5 weeks later. If someone claims UC as soon as they finish work they are quite likely not to have received their final wages. If their final wages are paid after they make their claim then they will use their final wages to live on during their first Assessment Period and be expecting full UC five weeks later. However they will find that they are entitled to nothing or very little and will have to wait a further month with no income at all before they get their first full UC payment

  1. Self employed people

For self-employed people, the problem of earnings counting towards the single assessment period at the point they happen to be paid is particularly serious. This is due to the application of a ‘Minimum Income Floor’ (MIF), which means that they are treated as earning no less than a certain amount (normally the equivalent of 35 hours per week at their relevant rate of minimum wage – around £1050 per month for a someone over 25).

It is common for self-employed people to have fluctuating earnings – often simply on account of variations in when they get payments come in for work they have done. The application of the MIF means that if a claimant receives two months of earnings in a single assessment period, and then none the next month, they would have their full actual earnings taken into account for the first assessment period, but the MIF would be applied in the second, meaning they are treated as earning £1050.

The intention of the MIF was to prevent the State providing long term support for failing businesses – the way earnings are treated instead means that it will penalize successful small business people purely on account of their fluctuating income.

Conclusion
From those claiming Universal Credit after leaving a job, through to self-employed claimants with variable earnings, the way in which earnings are treated in Universal Credit causes serious problems for a number of different groups.

The first thing that needs to be done is that when someone is paid after leaving employment, their earnings should be treated as being paid on their final day of work – not on the date they are actually paid out. This would ensure they do not count towards their first Universal Credit assessment period.

The second is that people should be able to average their earnings over multiple assessment periods if this best reflects the way in which they are paid. This would help to enable claimants to “smooth” fluctuating incomes which can cause irregularities in entitlements. This is particularly important for self-employed claimants who may otherwise be affected by the Minimum Income Floor.

“A devastating picture of administrative chaos, computer errors and political misjudgements” – nope, not Universal Credit this time.

 

It is tempting to think that a “devastating picture of administrative chaos, computer errors and political misjudgements” in the social security system must be a reference to Universal Credit over the last few months. It well could be, but this is, in fact from George Osborne back in 2005 emphasising that problems with the Tax Credits system had become so serious he believed that there were serious questions over the future of the responsible Minister.

Many of the problems were to do with the way in which Tax Credits are calculated and paid. Whilst, as we shall see, many of the problems were addressed at the time, cuts to the benefits system mean that they have been rapidly re-emerging in recent years.

Why were Tax Credits such a mess when they were first introduced?

Tax Credits are an annual award – the total amount a claimant is entitled to is calculated for the whole year. However, people, and particularly those living on the lowest incomes, need to receive payments more frequently than once a year. For this reason they are normally paid on a weekly or four weekly basis, based on an estimated entitlement for the whole of the year. Since Tax Credits are means-tested, the claimant’s household earnings over the course of the year can affect the overall amount due – predicted annual entitlement is based on what the claimant thinks their income will be for the year.

The difficulty arises at the end of the year, when the award amount is checked against the household’s actual income for the year. If the household’s income is lower than the estimate, then the award may have been underpaid and is topped up to the actual entitlement. If the household’s income is higher than the estimate, then this can result in the award being classed as overpaid and the government asking for some of the money back

We aren’t talking about small amounts of money – in 2004, at the height of the Tax Credit problems, around £1.9 billion was overpaid to households in receipt of Tax Credits.

To reduce the likelihood of overpayments occurring, the Tax Credit system has a built in “buffer zone” (known as the “income disregard”) which means that a household’s income can rise by up to a given amount during a year without affecting their Tax Credit entitlement. In the mid 2000s, as a result of the amount of Tax Credits being overpaid, the government decided to increase the income disregard from £2,500 to £25,000. In effect this meant that if a claimant had been paid Tax Credits for a few months at the start of the year based on their previous year’s earnings of £10,000, and then changed job so that by the end of the year they had earned £35,000, their overall Tax Credit entitlement wouldn’t be affected.

Some overpayments are in fact impossible to avoid without a buffer zone – a household that has a low income for most of the year and then gets a sharp but unforeseeable increase in income may have already had more than their yearly entitlement before the rise in their income.

What’s gone wrong with welfare reform?

Despite this positive effect, following the 2010 election, the coalition government decided to reduce the size of the overpayments buffer zone – first from £25,000 to £10,000, and then to £5,000.

Astonishingly, the coalition government also decided to introduce the reverse of a buffer (an anti-buffer?) which disregarded falls in income of up to £2,500 from 2012. This means that when (for example) a worker sees their hours reduced so that they earn £2,500 less than they did the previous year, the earnings figure used to calculate Tax Credits is not immediately adjusted down. Instead they are treated as if their earnings are the same as the previous year – which could cost them more than £1,000 at a time when they are likely to be struggling.

As the income disregard has been reduced, overpayments (again, unsurprisingly) have increased.  As large a proportion of Tax Credit claimants face overpayments than during the height of Tax Credit problems in 2005, with one in three claimants facing an overpaid award, and £1.6 billion of overpayments in 2015-16. This includes some exceptionally large overpayments – including around 50,000 families overpaid by more than £5,000.  In 2005 when these problems were first recognised, the then shadow (and later actual) Chancellor of the Exchequer called for the resignation of the Minister responsible. The response of the government was dramatic – not only did the Prime Minister apologise, but the large increase in the size of the income disregard was a direct response.

In 2015, when he himself was faced with a similar scale of problems within the system, the response of the Chancellor was to further reduce the level of the income disregard, back to the 2003-4 level of £2,500. We don’t yet know the impact that this will have on overpayments, but the Chancellor expects to save quarter of a billion pounds from this measure at its peak in 2018-19.

Giving credit where credit’s due

It is tempting to think of the Tax Credits system as a thing of the past, focussing instead on the profound mess which is being made of the introduction of Universal Credit. However, it is important to remember that more than 4 million families (with more than 7 million children), still rely on vital Tax Credits to make ends meet – and will do for the next few years at least.

It isn’t good enough to just focus on improving Universal Credit – the Tax Credits system need fixing. For a Government which wants to improve the fairness and simplicity of the benefits system, removing vital income disregards which prevented families from falling into benefit debt is a move in entirely the wrong direction.

 (This blog was first published on the Policy Press website here)

 

Introducing Broken Benefits

It is unusual for something to be simultaneously so crucial, yet so disliked and mistrusted, as Britain’s social security system.  The same system which prevents mass destitution, and reduces social inequalities, is also seen as badly targeted and poorly operating.

Broken Benefits looks at the crucial period from 2010 – when benefits reform started under the coalition Government – through to 2020, when the process of reform will be well underway (though still by no means complete).

The book makes the case that over this period welfare reform has failed in three key respects.  It has deeply undermined the safety net which protects households from destitution, it has failed to make the system easier for claimants to navigate, and it has failed to increase the “fairness” of the benefits system – including failing to “make work pay”.

Punching holes in the safety net

The first job of an effective social security system must be to prevent mass poverty and destitution.   The benefits system was by no means perfect in this regard, but reductions in the value of many key benefits between 2010 and 2020 are expected to significantly drive up poverty rates over the course of the decade – by 2020 15.6 million people are expected to live in poverty, 2.5 million more than in 2010.

In part this is the result of cuts in key benefits – such as the introduction of the “2 child limit”, reductions in support for many disabled children, and cuts to help for those unable to work because of ill health or disability.

However, in significant part this is also the result of reductions in the value of benefit entitlements relative to rising costs of living.  For example, whilst costs of living (as measured by the Retail Prices Index) are expected to rise by around 35% between 2010 and 2020, Child Benefit will have increased by just 2% over the decade.

A simple calculator here helps show the comparative “safety net” benefit entitlements – (by which I mean the amount that claimants might receive if they have no other income or savings) in 2010 and 2020.

Whilst much has been made of the increasing value of the State Pension, one of the groups most severely affected by cuts to the safety net has been “younger older” people – those in their early to mid sixties – and particularly those on a low income.  At the start of the decade this group might expect a retirement income from the age of 60, but by 2020, will have to wait at least an extra seven years; for many this will remove the best part of their retirement.

Of course it is not just the value of core benefit entitlements which affects the safety net.  Rules which restrict how quickly claimants can get paid, which restrict access to additional disability support, which make it harder to appeal a poor decision, or which impose sanctions for minor infringements of the rules, can all mean that the amount which people actually receive is less than might otherwise be expected.

Benefits complex-ification

Much sought for, and extremely hard to achieve, a key goal of welfare reform has been simplification of the benefits system.  Over the course of this decade, welfare reform has achieved the reverse.  A system which was always hard to navigate has now become nigh on impossible.  The benefits system is now laden with traps which can prevent people from getting the support they need.

For some people, the system may present problems of when to claim benefits – with a few days difference leaving potentially leaving people hundreds of pounds worse off.  For example, the complex rules for Universal Credit payments mean that if the date you are paid by your employer doesn’t perfectly align with the date of your claim for benefit you can find yourself with significantly less money as a result.

In other cases, some people may actually be worse off claiming benefits to which they are entitled.  For example, this is the case for some working families claiming Widowed Parents’ Allowance which may both be deducted in full from other benefits that they receive, and also be taxed.

Many of the complexities in the system are the direct result of cuts to support.  For example, cost saving reductions in the value of “earnings disregards” in the Tax Credits system mean that many people who face earnings fluctuations during the course of the year can find themselves being paid the wrong amount through no fault of their own.  In 2014/15 more than one in three Tax Credit claimants faced an overpayment on their claim. 

A less fair system

One of the key goals of welfare reform – and in particular, the introduction of Universal Credit – has been to improve the “fairness” of the benefits system. For example, recognising that for many people work “doesn’t pay” because of deductions from benefit entitlements when people move into employment, or take on additional hours.

However, many of the reforms introduced in recent years have actively reduced work incentives.  For example, a couple of years ago the Government announced cuts to the “work allowances” in Universal Credit.  This change reduced the amount of money someone could earn before additional earnings start to affect their benefit entitlement, and will cost some working families as much as £2500 per year.

However, whilst it is perhaps the one which has received most attention, this is only one of a number of recent reductions to in-work benefits for different groups.  For example, the removal of the so-called “limited capability for work” component of Universal Credit removes a significant portion of in work support from working people who face difficulties as a result of disability or ill health.

Social security wasn’t working in 2010, but by 2020 it is heading towards being a complete mess.  The safety net has been punched full of holes; it frequently punishes behaviour which ought to be rewarded; and, in many respects, it is becoming increasingly complex for claimants to navigate.

The system needs fixing – and future blogs will start to set out some possible approaches to this.  However, in the mean time, it is important to remember that for all its faults the benefits system remains something in which we should take pride.  It is a system which each day prevents millions of households from facing destitution and is a critical leveller of income inequality.  It needs fixing, but perhaps it is only by first recognising how important it is, that we can start to make the changes needed.