The ‘poverty premium’ pushing the Just About Managing to the edge

It costs extra to be poor. And now, that additional cost is hitting those on the breadline even harder

Poorer adults are at a critical tipping point thanks to the poverty premium (Getty)

Poverty isn’t cheap. A combination of effects, including being unable to take advantage of the cheapest ways and opportunities to pay for goods and services, means that low-income households pay an average of £490 more for essentials each year compared to households where money isn’t quite so tight.

And that is just the average premium; for some households it is far, far higher. According to the study carried out by the University of Bristol, poorer households typically pay between £350 and £750 in “poverty premium” each year. Single-adult households were the hardest hit, followed by lone parents.

While the £490 figure is a smaller amount than previous estimates – Save The Children had previously suggested it could be as much as £1,300 a year – it is a significant sum for just-about-managing families.

As the report states: “The average poverty premium of £490 per year is undoubtedly a significant sum to low-income households. It might represent a family holiday, enough clothes and shoes for the children, keeping the home warm in the coldest winter months, all things considered important for a reasonable quality of life and avoidance of social and material deprivation.”

Not-so-premium products

The reasons for the extra expense vary, but they range across a wide number of essential goods and services – like paying to withdraw cash (£9 a year), using a pre-payment meter (£38 a year), using higher-cost credit like payday loans (£55 a year) and paying higher insurance premiums because of living in riskier areas (£84 a year).

However, those are just the average costs. Depending on what services or products each household needs, the costs can be eye-watering. If a household is unable to qualify for mainstream credit then they may have to turn to a doorstep loan costing an extra £540 or a payday loan that costs an additional £120.

Katie Schmuecker, head of policy at the Joseph Rowntree Foundation (JRF) explains: “Sometimes the preferences of, and constraints faced by, low-income consumers compound the problem – such as when people can’t afford to pay upfront for insurance and must pay extra to pay monthly; or the need to keep a tight control over a limited budget leads to the avoidance of direct debit, even though it’s usually cheaper.

“Lacking the internet, transport or affordable credit, all of which help people to get a better deal, makes matters even worse. The picture changes, with new poverty premiums emerging – and some disappearing – as products and markets change.”

The poverty premium doesn’t just hurt the households it directly affects. By tipping just-about-managing families into poverty it costs the taxpayer a significant sum as well.

Research from the JRF suggests that poverty costs the UK £78 billion a year, which translates into £1,200 for every person – equivalent to 4 per cent of our GDP. £1 in every £5 spent on public services goes towards supporting people in poverty or dealing with the fall-out.

Ending the poverty premium was the foundation’s very first step in its recent ambitious plan to end UK poverty by 2030.

Ms Schmueker elaborates: “Tackling the higher costs faced by lower income households is vital if we are to bring down poverty levels. To achieve this, Government should task regulators with identifying and eliminating poverty premiums in sectors like energy. We also need to see new products that are designed to meet the needs of people on lower incomes and, where this isn’t possible, provide other ways of compensating people for unfair additional costs.

“We also need people living in poverty to be given a bigger voice in the debate, which requires consumer organisations to have more funding, capacity and information to tackle the poverty premium.”

Getting worse

The study from the University of Bristol’s Personal Finance Research Centre showed how much the premium is but it did not reveal the extent to which low-income householders are forced to cut down on essentials such as heating or food.

​Yvette Hartfree, research fellow at the centre, adds: “The poverty premium only reflects the additional costs low-income households pay compared to higher-income households. It doesn’t take into account the extent to which low-income households avoid paying poverty premiums simply because they can’t afford to and instead go without.”

Campaigners say that the poverty premium could be tackled, but it would take highly targeted state intervention. In the meantime, rising inflation will make life even harder for the UK’s poorest, and the Consumer Prices Index (CPI) is currently at 1.6 per cent, the highest rate since July 2014.

Previously, UK households on the lowest incomes would have been partially shielded from climbing prices as their benefits and tax credits would also rise in line with CPI. However, since April 2016, benefits for working age people who are not disabled have been frozen and will remain frozen until 2020. That means the poorest households are experiencing a real-terms cut in benefits, even before other austerity measures kick in.