The introduction of Universal Credit has led to much confusion about how protection policies impact a consumer’s ability to receive state benefits. After excellent work from the Income Protection Taskforce and Building Resilient Households Group the DWP has provided some guidance on how such policies interact with Universal Credit, albeit further clarification is still required. In this insight we will look to explore what clarification has been received to date and how this may impact consumers.
What is Universal Credit?
Universal Credit (UC) is a relatively new welfare reform that has replaced six means-tested state benefits and credits namely:
• Income Support
• Income–related Job Seeker’s Allowance
• Income–related Employment & Support
• Housing Benefit
• Working Tax Credit
• Child Tax Credit
As Support for Mortgage Interest is linked to both Job Seekers Allowance and Employment & Support Allowance, with both benefits being replaced by UC, mortgage support will likewise fall under the “Housing Element” of UC.
UC is designed to provide financial assistance to those out of work but also provides tapered top-up’s to low earners designed to make returning to work more financially appealing. The benefit is means-tested with eligibility and the amount of income provided determined by the income and capital of the household, not the individual. To qualify consumers’ need to be between 18 and state pension age and have household savings of less than £16,000. For those that do qualify they will receive up to £1,100 per month if in a single person household, and £1,700 per month for couples or families.
To access mortgage support under UC, where it is a joint mortgage, a new condition applies known as the “no earned income rule” this means that neither party to the mortgage must be earning as a prerequisite for mortgage welfare support – a key consideration for past, present and future joint mortgaged and dual earning customers.
We are currently in the extended rollout phase with all new claimants expected to be on UC by the end of 2018 and legacy benefit recipients to be switched across in a “managed migration” by 2023 based on postcode.
What were the issues?
Firstly, Universal Credit is not an issue for everyone with protection plans. Those clients that have £16,000 or more in savings will be ineligible for the benefit from outset. For those with modest savings the impact will be felt if they become unable to work because of injury or ill health. For many, UC could potentially become an issue when they make a claim on their protection policy.
Payments received from an income protection policy are classed as unearned income under UC and therefore for every £1 received the amount of UC they are entitled to will reduce by £1. For those with high monthly payments from their income protection plan this is unlikely to make much difference, however those with relatively low payments may find that they receive little value from their income protection plan compared to what they might have received from UC.
What has changed and what does this mean?
Due to lobbying from the Building Resilient Households Group the DWP produced further clarification in July 2018 on UC, Income Protection for those with mortgages. In simple terms the clarification states that where a protection policy is ‘intended’ and ‘used’ to pay mortgage payments, it will be not be part of the means-testing calculation for UC benefits. The two critical words here are ‘intended’ and ‘used’.
The clarification is a positive recognition for protection policies, but important grey areas still remain. Currently, no income protection plans have the ability for you to both designate a proportion of the benefit for mortgage payments and pay those designated benefits directly to the lender.
‘Intent’ is likely to be required from the adviser within, for instance, their suitability letter. Johnny Timpson, Financial Protection Technical & Industry Affairs Manager at Scottish Widows suggests “My advice to advisers when writing up new reports or policy reviews is to include a paragraph that documents that claim proceeds are intended to be used in whole or in part to service loan debt.”
Justin Harper, Head of Marketing at LV= shares Johnny’s sentiments stating “Many do this already, but we suggest that advisers do need to signal – and document – that IP pay-outs may affect the client’s state benefits. Plus, where the client is applying for a mortgage, or already has one, that the policy income pay-outs will help cover essential outgoing and bills, including the mortgage.”
‘Use’ is also difficult in the current climate but again not insurmountable. Johnny who is also the Disability Champion for the Insurance Industry & Profession explains “Ideally we need IP product development that enables split claim payment and pays the mortgage segment direct to the lender; this being the option that will work best for consumers and DWP. It would be great if providers could make this change to their current claim process but if not, to benefit from the disregard the claimant may need to demonstrate to a DWP welfare benefit claim adjudicator that part of their claims proceeds are being used for loan repayment purposes.”
Overall the changes and clarification to date are extremely positive for consumers. As many will know mortgage repayments form a substantial part of most consumers expenditure and to have this disregarded from means-testing is excellent news.
Income protection remains an extremely valuable policy as it provides guarantees of income if a client is unable to work due to injury or illness. As Justin states “For advisers and consumers (and providers), the greatest challenge presented by UC is ‘uncertainty’. We do not know now, if or when a person might make a claim under their policy, the nature of that claim or, importantly their financial circumstances and the UC rules in play at that time. The principle of peace of mind – and certainty – offered by income protection is key.”
The Building Resilient Household Group are continuing to work with the DWP to provide further clarification on treatment of capital pay-outs (from life, CI and TI) under UC and what can be done to disregard rent, utility bills, broadband, council tax and child care commitments from means-testing. The latter, however will require secondary legislation to move forward.
In the interim, the emphasis is on product providers to design and structure new ways to accommodate the changes, particularly with income protection. It seems likely that this will spark product innovation, which if it leads to better consumer outcomes will always be welcome.