People struggling with money are paying an extra £478 for essentials like energy, credit and insurance because of the poverty premium, according to new research by the University of Bristol’s Personal Finance Research Centre.
The Fair By Design study of 1,000 low income households [1] accessing the services of national poverty charity Turn2us, shows that poorer households are spending the equivalent of 14 weeks’ of food shopping just to access the same services as people who are better off.[2]
- Car insurance was the biggest contributor to the poverty premium, with some people paying nearly £300 more a year because of living in a deprived area. Additional charges for paying monthly instead of annually could mean an extra £160, for a total poverty premium of nearly £500
- Credit is expensive when on a low income, whatever form it takes. A sub-prime credit card costs around £200 more a year (between £194-£207) and personal loans cost more than £500 extra
- Being on the best energy prepayment tariff could still be £131 more expensive than the best online-only one. But being on a fixed tariff could still be costly: not paying by direct debit cost up to £143 more a year.
The experience of the poverty premium is diverse among different age groups. It will affect under 35s, struggling with the costs of owning a car. For over 65s it is because of digital exclusion and inability to access and engage with the market, like not being able to switch online to the best energy or insurance deal. Switching rates among families with young children tend to be higher. However, they were more likely to use expensive forms of consumer credit for household goods like washing machines or fridge freezers.
Martin Coppack, Director at Fair By Design, said:
“It isn’t right that the people with the least, are paying more for essentials like heating their homes and insuring their car. The poverty premium pulls people under and makes it hard for them to stay afloat. But it doesn’t have to be this way.
“We’ve seen the positive impact that regulation, such as setting price caps, has had on reducing the poverty premium in energy and high cost credit. Regulators should now work together to find solutions for people struggling across all markets. And by eliminating the poverty premium, we can make our society fairer for all.”
Jamie Grier, Director of External Affairs and Income Generation at Turn2us, said:
“The poverty premium is an inherently unfair penalty for people struggling with money, and it only exacerbates the difficulties of those of us who are managing on a low income. This vicious cycle locks people into high costs, debt and living without the essentials many of us take for granted.
“However, this is a solvable problem. Stronger regulation of financial products, an improved social security net with crisis grants and protective changes to the energy market would mean we can start eradicating the poverty premium.”
Read the executive summary and full report.
[1] Survey of 1,000 low income households in 2019.
[2] Research by Turn2us found that the average weekly spend on food and non-alcoholic drinks in the lowest 10% income group was £32.80.