The poverty premium - paying more for essential goods and services
New research by Bristol University has investigated the UK poverty premium – when low-income households pay more for essential goods and services compared to those on higher incomes.
Poverty premium costs low-income households on average £490 a year
The research shows that the poverty premium costs low-income households on average £490 a year, with only an estimated 1% of low-income households in the UK not incurring any sort of poverty premium.
Reasons for the poverty premium
The poverty premium exists because of three main factors:
- The choices low-income households need to make as a result of strict monthly budgeting, e.g. low-income households often pay car or home insurance monthly (which incurs a premium) because they could not afford to pay annually upfront.
- Market practices which impose additional costs on low-income households, e.g. insurance companies apply area-based premiums for insurance cover in higher risk areas, where low-income households are more likely to live.
- Market practices which exclude low-income households, e.g. the cheapest fuel tariffs are accessed by regularly comparing tariffs and switching online, but high rates of digital exclusion makes it difficult for low-income households to switch fuel tariffs.
The poverty premium exacerbates poverty
The significance of the poverty premium is that it adds to the difficulties low-income households face in making ends meet. The table below sets out average premium costs and the number of households in the UK currently dealing with each premium type:
|Premium type||Example of premium (£ per year)||Low-income households incurring premium (%)|
|Use of prepayment meters (PPM)||PPM for electric or gas (£35)||2.6m (33%)|
|Non-standard billing methods||Paying car insurance monthly (£81)||4m (50%)|
|Not switched energy tariff||Not switched energy provider (£317)||5.8m (73%)|
|Paper billing||Paper bill for telecoms (£23)||3.9m (49%)|
|Area-based premiums||Car insurance in a deprived area (£74)||5.8m (73%)|
|Insurance for specific items||Mobile phone insurance (£60)||1.8m (23%)|
|Access to money||Cheque cashing services (£30)||2.3m (29%)|
|Higher-cost credit||Subprime credit card (£194)||1.3m (16%)|
Addressing the poverty premium
Researchers from Bristol University set out some ideas for how the poverty premium can be addressed.
- Low-income households have particular needs around the way they manage money and that products and services designed for middle or higher-income customers may automatically disadvantage them.
- The responsibility of avoiding a premium should move away from households (i.e. by deciding to switch provider) and on to suppliers by not charging it.
- Mainstream providers need to do more to extend their reach, i.e. major supermarkets introducing more local convenience stores or banks offering more no-fee cash machines in low-income areas.
- The extent to which premiums are cost reflective should be investigated, e.g. the additional cost of paying for insurance monthly or requesting paper bills.
- Stakeholders need to work together to develop a larger-scale of affordable credit alternatives.
What can be done for low-income households now?
Housing advisers and support workers can help their clients who are living within a low-income to become more financially aware and increase their budgeting skills.
Credit unions offer fair, competitive loan rates, that are capped by law and which are significantly cheaper than pay day loans or loans from moneylenders. Brian McCrory, President of the Irish League of Credit Unions, has explained that a payday loan of £400 over 31 days could cost a consumer £129 in interest and charges from a moneylender, whereas the same loan would cost just £4 from a credit union.
Housing Rights is offering brand new, one day, accredited training on Increasing financial capability to safeguard homes which will help housing advisers, support workers and lenders empower their clients to be more financially aware and manage their own budget. Increasing the financial capability of low-income households is a hugely important issue, particularly in light of the impact of welfare reform yet to be fully realised in Northern Ireland, which we expect to mean more people will struggle with their finances and, consequently, be at risk of losing their home.
If you are interested in discussing training needs specific to your organisation, please contact us.
If you are struggling to pay for your home, contact our helpline on 028 9024 5640.