The government is putting great faith in ‘jam jar accounts’ to help benefits claimants manage their finances following the introduction of universal credit. But there are a number of problems, notably a lack of interest and the prohibitive cost
In front of the Work and Pensions select committee on Monday, government ministers re-stated their intention to pursue the Universal Credit reforms, on time and without revision.
This came hot on the heels of new research launched earlier that day from the Social Market Foundation that showed that the Universal Credit risks backfiring and undermining key objectives of the benefits reform.
Our report – which included in-depth interviews and focus groups with low income households – found that the shift to a monthly payment and the routing of housing benefit payment via social tenants (rather than the rent payment going direct to the landlord) are set to undermine the financial resilience of vulnerable households.
After the committee hearing, the Department for Work and Pensions announced a programme ‘calling for a range of suppliers to explore the feasibility of new financial products to help benefit claimants to budget and manage their money’.
Given that this represents a major part of the Government’s response to the budgeting challenge for households, the measure warrants proper scrutiny. In particular: what are these proposed new financial products? And will they be the answer to the problems identified in the SMF’s research?
The proposed accounts will include special facilities to help claimants budget. Often called ‘jam jar accounts’, these products offer households a method to separate their income into different pots, which can then be diverted to specific expenditure – such as rent or bills. Such initiatives exist already. Currently, approximately 150,000 individuals make use of similar accounts; these are provided by credit unions and a small number of other financial service providers.
Expanding the provision of special accounts to help people on lower incomes budget could alleviate some difficulties for specific categories of claimants. Our analysis suggested that such a service could be beneficial for people who are on the fringes of financial services or who make limited use of their financial products. Some, more confident, interviewees noted that the benefit reform changes could encourage them to look to more direct debit payments and separate accounts.
But these accounts alone will not resolve the real problems identified in our research. This is because of two major challenges: interest in such products is low, and their costs are prohibitive.
On the first of these, bringing people into financial services and keeping them there is extremely difficult. Although the number of the ‘un-banked’ has halved since 2003, there are still over a million people without a functional bank account. Evidence suggests that these individuals are significantly more disadvantaged than those who have moved into banking.
Yet even among those who are now using banking services, many do not use them in the way that policy-makers think, using only limited aspects of the service. Many cycle in and out of banking; and some are put off for good by bad experiences such as overdraft charges.
Among those families who are engaged with financial services, there are mixed views about jam jar accounts. Some were positive, noting the benefits of being able to pre-commit money to different costs and as a method of providing additional stability and structure to their budgeting. However, many held the opposite view. Such accounts were seen to undermine the flexibility of their budgeting and their ability to juggle different payments. Others noted that such accounts would replicate the budgeting they do in their home already.
What’s more, our interviews showed that many who use cash do so deliberately. Some argued that cash offered greater flexibility than automated debit deductions in terms of when bills were paid – while the latter went out for fixed amounts on fixed dates, cash payments could be juggled more easily, being brought forward, delayed or reduced. Drawing out cash also made it easier to keep a tab on spending and could therefore act as a rationing device.
These are the realities for many budgeting on a low income, especially for those least likely to cope with the benefit changes.
But even if there were sufficient interest in such accounts, the elephant in the room is how to pay for them. Users of these products typically have to pay between £12 and £14 per month for the privilege, yet there was strong opposition among our participants towards the idea that households themselves might have to pay for such a service.
Demand for these products is likely to disappear if claimants have to bear these costs. With eight million households being transferred on to Universal Credit, subsidising even a portion of them would be enormously expensive.
That is why we are calling for a more proactive role for the DWP.
Far better than outsourcing this problem to third parties, would be for claimants to be able to make a series of decisions on how their benefits are distributed before the money hits their bank account. Under our proposals, claimants who feel that the standard monthly lump sum would cause them hardship could opt in to a Universal Credit Budgeting Portal. This tool would allow claimants to structure their money before their benefits arrive. Claimants could:
- decide the frequency of payments into their accounts;
- determine the destination of payments to third parties (such as social landlords or childcare providers);
- divide up the benefit payment across different household members;
- and, choose to opt in to an automated savings account that diverts money off at source.
If designed imaginatively, such a budgeting tool could also allow claimants to develop links with credit unions as a route into financial services (through the savings account) and a method of building up a credit history.
None of this is to say that those organisations developing jam jar accounts – including councils, housing associations, banks, credit unions, pre-payment providers and others – are not going to provide a useful service. For some claimants they are, and their efforts are to be welcomed. But this is no solution to the general problems that the new system will create.
Nigel Keohane is deputy director of the Social Market Foundation
