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 accessing the services of national poverty charity Turn2us, shows that less well off households are spending the equivalent of 14 weeks’ of food shopping just to access the same services as people who are better off.
- Car insurance was the biggest contributor to the poverty premium, with some people paying nearly £300 more a year because they live in a deprived area. Paying monthly instead of annually could mean an extra £160, for a total poverty premium of nearly £500.
- Credit is expensive 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 costs up to £143 more a year.
The experience of the poverty premium is diverse among different age groups. For example it affects under 35s, struggling with the costs of owning a car but it also affects over 65s because of digital exclusion and struggling to switch energy providers online or find the best energy or insurance deal. And for those families with young children switching rates tend to be higher. However, they were also 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 us 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.”