The vicious cycle of the Poverty Premium

People in poverty pay more for a range of essential products and services such as energy, credit, and insurance. This is called the Poverty Premium: the extra costs of being poor. Poverty is a driver of the Poverty Premium, and the Poverty Premium is, in itself, a driver of poverty. It’s a vicious cycle locking people into a situation where they continuously struggle to make ends meet.

It doesn’t sound fair and it isn’t, but it doesn’t have to be this way. Products and services can be designed to meet the needs of everyone. Fair By Design is a movement dedicated to reshaping essential services so they don’t cost more if you’re poor. We collaborate with industry, government, and regulators to design out the Poverty Premium. Our Venture Fund provides capital to grow new and scalable ventures innovating in the market.

What is the Poverty Premium?

Being poor costs more when you’re not on the best energy tariff because you just don’t have the confidence to go online and compare providers. Or when your home insurance policy renews with a higher premium but you’re not sure why, and don’t feel you comfortable with the jargon. In fact, you might have been priced out of purchasing home insurance, so when the washing machine breaks down, your only options for replacing the appliance are a payday lender or rent-to-own company, where you will end up paying up to double the recommended retail price.

So how many people are we talking about?

There are over 14 million people in poverty in the UK according to Households Below Average Income data, and the Social Metrics Commission. The Personal Finance Research Centre at the University of Bristol estimates that nearly three quarters (73%) of people in poverty pay a premium for not being on the best value energy tariff. That is around 10 million people – or more than 1 in 7 of the UK population. Estimates for the average Poverty Premium paid annually by low income consumers, range from £256 (Social Market Foundation) to £490 a year (Personal Finance Research Centre, University of Bristol), but can be as high as £780 for those most highly exposed to the extra costs. This is a significant portion of somebody’s cash budget.

Why does the Poverty Premium exist?

1. The myth of the ‘super consumer’: very few people have the time or know-how to compare the prices of every product or service that they buy and then switch to better deals.
2. The unfair costs of living: The cruellest irony of poverty is that it is so expensive. Living costs have increased faster for the poorest households than the richest, exacerbating already-existing inequalities. Not to mention when people are considered too “risky” for insurance or credit firms.
3. One size doesn’t fit all: Millions of people are on insecure zero-hours contracts, or paid weekly with uneven income levels. They don’t have the money up front to make cheaper annual payments, and instead are charged high levels of interest to pay on a monthly basis. Products and services haven’t been designed with low income consumers in mind. 

The age component of the Poverty Premium

There are nearly 1.6m pensioners in poverty. These older consumers are likely to be paying a ‘loyalty penalty’ for many everyday services such as energy and insurance - for example they are more likely to have been with an energy supplier for 4+ years.

Or they may just not be aware that they are paying more. The Financial Ombudsman recently noted that “from the complaints we see, it’s clear insurance is an area where people may feel they’ve been penalized for staying put. People who’ve stuck with their insurer for a number of years are telling us they’ve discovered they’re paying far more than new customers – or more than they’d pay for similar cover elsewhere.” In cases where premiums had risen year on year, eventually reaching levels that customers – or their relatives - considered unfair the Ombudsman found that people had been counting on businesses to do the right thing.

However, there is also the question of access:  Age UK found that nearly a quarter of 65-74 year olds had not been online recently, defined as within the last three months. In addition to simply not owning a computer or internet-enabled device, this may be may be down to a lack of confidence in using the internet, or a lack of trust and fear of crime.  With comparisons between providers, be that of energy or insurance, only possible through the internet, this “digital by default” approach excludes consumers comfortable primarily with face-to-face or telephone interaction.

Eliminating the Poverty Premium is an urgent priority, but no one institution can achieve it alone. Government, regulators, businesses and other stakeholders all need to act together to design out the extra costs of being poor, to loosen millions from its grip.

Sohaib Malik is a Policy and Communications Officer at Fair By Design.