Acting on unfair poverty premiums must be a 2017 priority

The poverty premium costs low-income households on average £490 a year. With higher inflation forecast for 2017, tackling these unfair premiums on essentials will be even more vital for those who are just about managing, says Katie Schmuecker.

Reducing the cost of essential goods and services is as important as increasing incomes for reducing poverty in the UK. The less people must spend on meeting their needs, the more cash in their pocket. But unfair poverty premiums mean the poor are paying more for some essentials, exacerbating poverty and straining the budgets of the just about managing.

New research by Bristol University has laid bare the scale of the poverty premium for the first time. They estimate that on average the poverty premium is costing low-income households £490 per year. This research enables us to quantify for the first time the number of households subject to different types of poverty premium (see table).

Some premiums seem inconsequential, such as paying an extra £5 per year for a paper copy of an electric bill because you’re not online, or find it easier to keep on top of your budget with a paper copy. Others are eye watering, such as paying £540 over the odds for a doorstep loan because you can’t access mainstream credit or an additional £120 for a payday loan.

Averages can hide a multitude of different experiences, and the researchers found examples of families paying considerably more. Take the single earner couple with one child who had an income of £16,500 per year, but were incurring a poverty premium of £1,860 because they had a prepayment meter for both electric and gas, paper billing for telecoms, monthly payments to spread the cost of home contents and car insurance and several forms of high cost credit. In another example an out-of-work family with an annual income of £9,800 was incurring a £1,300 poverty premium. Only an estimated 1% of low-income households were not incurring any sort of poverty premium.

Table showing premiums experienced by low-income households (income is less than 70% of median income)
Premium type Examples of premiums (£ per year) Number of low-income households incurring this type of premium (%)
Use of prepayment meters (PPM)

PPM for electric (£35) or gas (£35)

2.6m (33%)
Non-standard billing methods

Paying energy bill on receipt (£38)

Paying contents insurance monthly (£9)

Paying car insurance monthly (£81).
3.9m (50%)
Not switched Not switched energy provider (£317) 5.8m (73%)
Paper billing

Paper bill for electric or gas (£5)

Paper bill for landline/broadband/mobile (£23)
3.9m (49%)
Area-based premiums

Car insurance in a deprived area (£74)

Difficulty accessing good value shops (£266)
5.8m (73%)
Insurance for specific items

Insurance for individual appliances (£132)

Mobile phone insurance (£60)
1.8m (23%)
Access to money

Fee charging ATMs (£25)

Cheque cashing services (£30)
2.3m (29%)
Higher-cost credit

Payday loan (£120)

Doorstep / home collected credit (£540)

Rent-to-own (£315)
1.3m (16%)

Source: University of Bristol and Households Below Average Income 2014/15

JRF’s own research shows poverty premiums occur when market failure results in a lack of price competition, markets simply do not offer products that are designed to meet the needs of low-income consumers, or it costs more to provide goods or services to low-income households. 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 Prime Minister has made clear her desire to make sure markets work better for low-income households. She told the Conservative Party Conference:

Where companies are exploiting the failures of the market in which they operate, where consumer choice is inhibited by deliberately complex pricing structures, we must set the market right.
Theresa May

The Chancellor followed this up with a commitment in the Autumn Statement to produce a Green Paper in Spring 2017 which will “closely examine markets which are not working fairly for consumers.” This ambition is to be welcomed – but the government should go further and commit to ending the poverty premium. Some actions to help bring this about include:

  • Regulators establishing intelligence functions to quickly identify poverty premiums, and being given a clear mandate to eliminate them.
  • Greater voice for people in poverty, which requires consumer organisations to have the funding, capacity and the right to request, analyse and publish data on the poverty premium.
  • Social Investors backing organisations and businesses developing new products to tackle poverty premiums. JRF is already working with Big Society Capital and other partner organisations to develop a social investment fund to end the poverty premium.
  • Where the poverty premium cannot be addressed through the market, other strategies such as compensating people for additional costs should be explored.

The urgency of the problem is made more acute by the forecast return of higher inflation in 2017 and 2018. If this feeds through into the price of essentials such as food and energy - which make up a larger share of the budgets of low-income households with or without a poverty premium - more people will find themselves tipping from just about managing to not managing.

JRF has teamed up with Big Society Capital, to work towards raising up to £20m of social investment to tackle the ‘poverty premium’. The initiative will support charities and social enterprises to develop solutions.