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Moving the Financial Resilience debate forwards

May 17, 2017

Now that the dust has settled after the consultations on the Green Paper and the new single financial guidance body (SFGB) it is time to look forward to how we can make progress towards making the households of the UK resilient in the event of sickness absence.

The facts are stark. 1.8 million people are off work sick for more than 4 weeks in any given year; 70% of longer term absence is in those employed by SMEs and 60% of absence is accounted for by women.

Yet 2016 MAS research shows that over 16 million people have savings under £100 and only around 3 million people are covered by IP bought by themselves or their employer. The scope for growing this market is huge.

So what next. First we need the Government to set up a high profile task force to support increased household resilience and make people aware of the options that are open to them.

The task force should be broad based and besides government it should include MAS (and the SFGB when it comes into being); employers; distributors; the FCA; charities; health and rehabilitation providers and NHS commissioners and insurers.

The creation of such a task force would fit well with the SFGB if the new body were to be given a statutory objective to improve household resilience against income shocks.

This should include those who are just about managing now plus others who are managing now but would not be able to do so when an income shock hits them.

Analysis of data from LV= shows a third of IIP polices are held by people earning below the national average, with 60% being held by basic rate tax-payers. This belies the myth that IP is only suitable for rich people.

The Government and the SFGB need to take pro-active and concerted action to achieve a step-change in resilience through national leadership to bring together the many agencies, businesses and third sector organisations that can play a role and to use their independence and authority to communicate the need for people to plan for income shocks, to signpost them to services and provide information and tools to help the public understand the risk and how to plan for it.

The Green Paper was right to seek views on how to increase take up of group income protection but they must also embrace IIP because even if coverage of Group Income Protection is extended it still will not always reach important groups such as the self-employed.

Second we have some important technical issues that need to be addressed. For many ordinary families, the benefits system cannot cover all their commitments.

Millions have mortgages or rental commitments beyond what the benefits system can cover, or other commitments/expenses which cannot be catered for in a taxpayer -funded system.

But the New Policy Institute (NPI) report illustrates how the new rules coming in for Universal Credit treat many people with IIP less favourably than the system they replace.

Families with children and people who rent are hit particularly hard as the ‘disregards’ and ‘tapers’ which help them in the legacy system are being withdrawn. This interaction is not a minor or theoretical issue.

As the State withdraws from paying any benefits to cover mortgage interest, any element of an insurance pay-out used to cover mortgage payments should be completely disregarded in the benefits system.

It seems irrational and self-defeating to remove the existing disregard for such payouts and treat them as available towards ordinary living costs.

A similar approach could also be applied to tenants. For example, any element of insurance which covers their ‘’excess rent” could be fully disregarded by the benefits system. (By ‘’excess rent” I mean the amount of rent that can’t be allowed by the benefits system because it exceeds a local or national cap).

Another option might be for people to be able to ‘’opt out” of drawing any state support for housing and in exchange the State would disregard any insurance payout they receive to cover their rent.

The graph below which was included in the NPI report shows the huge growth in generation rent following a long period of stability.

The rise and rise of 'Generation Rent'

Finally a taper and partial disregard on insurance payouts to meet living (as opposed to housing) costs should be introduced.

A logical starting point here would be for the ‘’earned income” taper and work allowances to apply to Income Protection in the same way as they do to Group Income Protection.

The reality is that both IIP and GIP involve putting aside a small amount of earned income to make prudent provision for future loss of earnings. In the case of GIP, this is facilitated by the employer whereas IIP is set up by the individual.

There seems no equitable reason why the latter course (which is the only route available to the self-employed and millions of other workers whose employers do not offer GIP) should be treated as less worthy than the former.

There may also be advantage in offering a specific new disregard on Income Protection payouts.

This would give a very clear message that it pays to make prudent provision – a message that is all the more important in the IIP setting as it requires the individual to make an active purchasing decision.

And for low income households a very simple basic policy which provides a fully disregarded sum would be extremely cheap and have significant impact on their wellbeing.

Later this year we can expect to see legislation to create the SFBG and a White Paper, with detailed proposals taking account responses to the consultations. I do hope we can look forward to some good news.

Written by Richard Walsh, SAMI Fellow and first published in Cover magazine, March 2017.

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