Deductions from benefits can cause family hardships

By Joseph Surtees, Senior Public Policy Advocate

Our new research published today finds that third party deductions can cause hardship and force people to turn to credit.

Today 2.9 million people are struggling with severe debt problems. Over 9 million more are showing signs of financial distress. Good debt recovery practices can both prevent and reduce problems. But where creditors don’t act appropriately, the impact can be severe.

Third party deductions (TPD) offer creditors a way of recovering arrears from benefit payments. However our research, published today, shows that TPDs can be harmful for a significant minority.

What’s a third party deduction?

A TPD is where the Department for Work and Pensions (DWP) deducts an amount from benefit payments to clear household arrears (for example, to utility suppliers or landlords).

The DWP can take a maximum of three deductions at any one time from a range of benefits, including Universal Credit. Crucially, the amount they can take under Universal Credit can be much higher than from other benefits.

How much can be taken?

When making a deduction decision, the DWP should consider if a deduction is in the interests of the individual. For benefits like Income Support, Income-based Jobseeker’s Allowance, and Pension Credit, the deduction rate is 5% of the personal allowance of a single claimant aged 25 or over. That’s about £3.70 each time a benefit is paid.

However, rule changes in Universal Credit are likely to exacerbate problems created by deductions, by increasing the amount that can be taken from benefits. Under Universal Credit, deductions for rent arrears can be between 10% and 20% of the standard allowance and the total amount that can be deducted could come to 40%.

To see a breakdown of the benefits, the deduction rates, and details of maximum deductions taken, download the full briefing paper (pdf).

How common are third party deductions?

In a survey of StepChange Debt Charity clients, just over a quarter (26.5%) report they’ve had money deducted from benefits to go towards arrears.

Clients who are in a vulnerable position are more likely to report (28.6%) they’ve had money deducted from benefits.

Over a quarter have two deductions in place (28.3%), and almost one in ten clients have three simultaneous deductions in place (9.6%).

Our clients are most likely to have money deducted for Council Tax arrears. Around a quarter (22.4%) with deductions in place pay their local authority in this way.

However, a range of other creditors commonly use deductions. Over one in eight (15.4%) are repaying water arrears through a deduction; a similar proportion have a deduction in place for a magistrates’ court fine (12.6%).

What impact do they have?

When making a deduction decision, the DWP guidance says it will consider if a deduction is in the interests of the family. Despite this, our client survey makes it apparent that deductions still often cause harm.

Of those who have had money deducted directly from benefits, 71% say that it’s caused them and their family hardship.

A quarter (25.7%) have cut back on food spending as a result of a deduction and a further 24.6% have found it difficult to pay for heating as a result of direct deductions.

Policy challenges and our recommendations

  1. The experience of our clients shows that the current level of deductions isn’t always appropriate and is causing hardship and further financial difficulty in some cases. Therefore, we recommend that deductions should be affordable for all, with a new minimum level created and greater creditor consideration given to not using deductions at all when they’re unaffordable
  2. Regulators of financial services and the energy sector have recently increased their focus on ensuring service providers pay attention to the needs of vulnerable consumers. The DWP should refresh its rules on deductions to better reflect the needs of potentially vulnerable individuals and the transient nature of vulnerability itself
  3. A firm using the £3.70 level of DWP deductions as a minimum point for starting negotiations drastically reduces the options of their indebted customers. Although addressing the issue raised by point one above would help resolve this, firms should consider if their policies best help customers. We suggest this could be an issue regulators help them examine

If you’re interested in discussing this further, please contact us at policy@stepchange.org and read the full report on the problems of third party deductions.

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