A report by the think tank examined capital means-testing in Universal Credit and found that outdated rules are conflicting with various Government policies aimed at encouraging lower-income households to save.
The report, entitled Saving Penalties, has been published as part of a partnership with Abrdn Financial Fairness Trust.
Capital thresholds
Current capital thresholds mean that a claimant’s Universal Credit entitlement is tapered away if they have savings of more than £6,000, with entitlement ending completely if they have savings of more than £16,000.
But these thresholds have been frozen in cash terms since 2006. Researchers found that in 2006-08, only one in three (35%) families in the UK had savings greater than £6,000, but by 2020-22, that had risen to nearly half (45%). Had the capital rules instead been uprated in line with prices, the figures would be £10,000 and £27,000 this year.
The authors estimated that in 2020-22, around two million families were eligible for Universal Credit based on income (with an average household income of just £15,700), but had their entitlement reduced due to the capital rules.
How life insurance can benefit your health and wellbeing over the decades
Sponsored by Post Office
Of these, 830,000 families faced a partial reduction, while 1.2 million families saw their entitlement wiped out entirely.
Capital rules undermining savings schemes
Capital rules are designed to ensure that claimants use their own resources before claiming benefits. However, Resolution Foundation found the rules are creating wider problems.
Firstly, the rules are undermining flagship Government saving schemes like Help to Save and Lifetime ISAs, which both encourage people to save.
Resolution Foundation said keeping savings accrued under these schemes within the scope of the Universal Credit capital rules weakens their impact and penalises families trying to build meaningful savings.
Secondly, a near 20-year freeze in capital thresholds means more and more low-income families are having their entitlement reduced by them.
Thirdly, the capital thresholds entrench the kind of cliff edges that Universal Credit was designed to phase out. For example, a family entitled to £750 per month in benefits (based on income alone) would see their entitlement reduced to £576 if they had £16,000 in savings – but it would drop to zero if they saved a penny more.
The Resolution Foundation said the rules “risk disincentivising saving and weakening financial resilience among low-income families”. It found that nearly one in eight (12%) Universal Credit recipients who can afford to save refrain from doing so to retain their benefit entitlement.
How to improve the system
Researchers at the think tank suggested that money saved through Help to Save and Lifetime ISAs should be exempted from the capital rules. The report’s authors said this would empower low-to-middle-income families to build more meaningful financial resilience and to achieve long-term financial goals.
Resolution Foundation also called for the capital limits to be uprated from 2026-27 onwards and for “cliff edges” to be removed.
Molly Broome, senior economist at Resolution Foundation, said: “Benefits are means-tested on both income and capital. But the long-term neglect of the capital rules in Universal Credit means they are now undermining wider Government efforts to encourage low-income families to save.
“Important schemes such as Help to Save and Lifetime ISAs should be exempted from these capital rules, so that families doing the right thing by saving into them aren’t penalised for doing so.
“And with the Government currently reviewing Universal Credit, it should take the opportunity to index the capital thresholds to inflation, to prevent the system from penalising more families every year. Fortunately, this can be done at limited cost to the Exchequer.”
Mubin Haq, CEO at Abrdn Financial Fairness Trust, said: “Given limited Government resources, it is right that those claiming means-tested benefits who have significant savings use these first before claiming support from the state. However, the capital limits for savings have failed to keep pace with inflation for nearly 20 years and this is leading to over a million low-income families being locked out of Universal Credit support.
“This particularly affects couples, the self-employed and those retiring early. Small changes to the capital limits and what counts as savings could improve the living standards of many struggling to make ends meet.”
