Iain Duncan Smith’s flagship Universal Credit programme could turn low-income working families into ‘second class savers’, a think tank has warned.
The report ‘Making It Work‘, by the independent think tank Resolution Foundation, is largely supportive of the government’s attempt to simplify the benefits system.
However, the report warns that flaws in the Universal Credit system need to be addressed before millions of savers are moved onto the new benefit.
In the current tax credit system, income other than earnings are treated depending on a persons employment status, resulting in non-working people being treated more harshly than those in employment.
Under Universal Credit, working families savings will be treated just as harshly as for those people who are not in work. For every £250 in savings over a £6,000 threshold, working families will lose £4.35 a month in Universal Credit payments – creating a disincentive to put money aside.
Those with over £16,000 in savings will get nothing at all.
Income from sources such as occupational pensions, maternity allowance and maintenance payments will result in a ‘pound-for-pound deduction’ in a families benefit entitlement.
The Resolution Foundation says this will deter families from putting any money aside in savings and has branded Universal Credit as being ‘particularly unfair’ for working people. Especially considering the government’s recent £1bn move to provide increased flexibility for ISA savers.
The think tank has called on the government to exclude ISAs from Universal Credit calculations, which they claim will benefit around 200,000 working people. Universal Credit should also treat income from sources such as pensions and maternity allowance in the same way as earnings.
Around 50,000 low-income households would also benefit if Universal Credit calculations treated maternity allowance in the same way as statutory maternity pay. The move would provide low-income families with babies a much-needed income boost, the report says.
David Finch, Senior Economic Analyst at the Resolution Foundation, said: “Universal Credit is in many ways a big improvement on the current benefits system. But there are also serious flaws in the new system that must be ironed out before millions of people move onto the new system.
“The harsh treatment of savings in Universal Credit will turn many working families into ‘second class savers’ – penalising them financially for doing the right thing and putting some money aside for the future.
“The undermining of saving for working families on low-incomes is particularly unfair given that the government has committed around £1bn in tax-relief to encourage other people to save, many of whom will be far wealthier than families receiving Universal Credit.
“The government should encourage all households to save when they can, irrespective of their income, and should end the unfair treatment of savers on UC.”
Stephen Timms MP, Labour’s Acting Shadow Secretary of State for Work and Pensions, said: “Labour backs Universal Credit because we want to ensure work always pays within in a simpler and more efficient benefit system.
“But the Resolution Foundation’s report makes clear the government is in real danger of missing those aims.
“Four years after its launch, the government still hasn’t worked out how basic features of Universal Credit will work, from which families will get free school meals to who will receive cold weather payments.
“It’s time for the government to resolve the many unanswered questions within Universal Credit. Ministers should start by asking the National Audit Office to publish a quarterly report on Universal Credit to lift the veil of secrecy over value for money and management of this £12.8 billion programme.”
Last updated at 16:00 on 8 June 2015 to add a comment from the Labour Party.