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Claiming Universal Credit and other benefits is tricky enough for most people – but as you start to save, you might find your entitlement drops. Or, you could have too much in your savings already to apply for benefits. Here, I’ll take you through the main ways savings could (and don’t) affect benefits.
Universal Credit Savings Taper and Limit
Other Means-Tested Benefits
Help to Save Accounts (And How It Impacts Benefits)
Lifetime ISA Accounts
Self-Employed Tax Savings
Deprivation of Capital
How to Save on a Tight Budget
Universal Credit is the main benefit most people will access at some point in their lives. It replaces the old Employment and Support Allowance (ESA) or Jobseeker’s Allowance (JSA) and other legacy benefits such as disability payments.
When you apply for Universal Credit, you need to provide bank statements to prove your need. If you have more than £16,000 in savings as a household, you won’t qualify for Universal Credit. This includes assets like stocks and shares, or a property you own but don’t live in. So, for example, if you’ve recently moved in with a partner but have a house that you’re renting out, you won’t be eligible. The exception here is if you’ve recently moved in with a partner and your previous home is currently on the market for sale. Universal Credit will exempt this asset for up to 26 weeks if you can prove it is on the market or in an uninhabitable condition. So, in another scenario, if you’ve moved in temporarily with someone else while your home undergoes extensive renovations, the property will be discounted for 26 weeks.
Your pension savings will not be assessed as capital, unless you are over the pension age (currently 55, soon to be 57) and can access your pension legally without penalty. If you don’t have a private pension income, you can claim Universal Credit up until State Pension age.
Disregarded savings also include life insurance plans not yet cashed out, pre-paid funeral plans, or personal possessions like jewellery or furniture (if already in possession at the time of applying – you can’t suddenly sink your money into buying a diamond necklace the day before you apply! See Deprivation of Capital, below).
If you have less than £6,000 in total assets and savings, you will be eligible for the full amount of Universal Credit for someone in your circumstances (such as age bracket, disability etc). Between £6,000 and £16,000 in savings and assets, you’ll lose a certain amount of your UC entitlement based on a taper.
You’ll lose £4.35 per month for each £250 over the £6,000 limit. So, if you’re a single person on the maximum £317 a month, and you have £8,000 in assets, your UC entitlement reduces to £282.20 per month (there are 8 x £250 in the excess £2,000 x £4.35 = £34.80 reduction).
As £282.20 is not enough for anybody to live off, it means you’re likely to dip into your savings to pay your full rent, bills, and living expenses. Make sure you update your UC Journal every month when your savings reduce as your entitlement will change and a new calculation takes place.
Sometimes, savings won’t affect benefits you’re entitled to – for example, Personal Independence Payment is applied to all eligible people regardless of whether they’re in work or have savings. Attendance Allowance is another non means-tested benefit, so you don’t need to worry about your savings if you’re applying for it.
However, Pension Credit and other benefits are means-tested. This means your savings will be taken into account. Means-tested benefits are:
The same £6,000 – £16,000 limit as Universal Credit applies. In some circumstances, there may be exemptions or additional reliefs – especially with things like Discretionary Housing Payments to top up Housing Benefit – so it’s always worth checking with your local authority about their processes and exemptions before you apply.
Help to Save is a fantastic scheme we like to shout about (because the Government keep it quiet!). If you’re in receipt of certain benefits, such as UC or Pension Credit, you could be eligible to open a Help to Save account.
In this account, you can save up to £50 a month for four years. At the end of years two and four, you’ll receive a bonus payment from the Government that equals 50% of the highest account balance in those two years. So, if you save the full £50 a month, you’ll have saved £1200 by the end of year two – and receive a £600 bonus. The same happens for the fourth-year payout, at which point the account closes.
It’s a fantastic scheme. However, if you have some savings and start to save in one of these accounts, be aware that it could put you over the taper limit. For example, let’s say you have £5,500 in assets and savings, and open a Help to Save account. Save £50 a month for two years, and that means you’ve now got £6,700 in savings – and will receive a further £600, taking your assets to £7,300.
Of course, most people will shift their £50 a month from existing savings into their Help to Save account, as it’s tough to keep saving when you’re on a tight budget. However, if you’re a savvy MoneyMagpie and follow our savings tips included in our free savings eBook, you’ll see it’s possible!
While you shouldn’t let this put you off saving, do keep it in mind if you’re on benefits.
This is such a tricky one. A Lifetime ISA is designed for two reasons: first, to help first-time buyers raise a house deposit, and second for a retirement income accessed when you’re 60.
However: if you’re applying for means-tested benefits, your LISA savings will impact your eligibility. So, you may have been saving really hard for a home into your LISA when you’re made redundant: you’ll need to access your LISA savings according to DWP when it comes to assessing capital for means-tested benefits. The same applies if you’ve been paying into a LISA for retirement income when you’re 60 – it’s all taken into means-testing consideration.
The problem here is that accessing your LISA comes with a financial penalty. You’ll have saved really hard – and benefitted from a 25% Government bonus on your savings… but if you withdraw your cash, you’ll lose the 25% bonus AND face a 6% fee. So you’ll get out less than you put in.
During Covid-19, the Government lifted this penalty fee. However, it’s now been reinstated. There are calls to eliminate it entirely forever, as it penalises those saving for their future (which the Government is trying to get us to do more) who face tough financial times ahead.
As all contractors and freelancers know: it’s important to have a financial buffer for your business expenses, including a hefty amount set aside for tax and National Insurance payments each year. This is compounded further by Payments on Account. (PoA means you pay 50% of next year’s tax bill with your January payment).
Demonstrate the money for your business is set aside for business costs to exempt it. The easiest way to do this is have the cash in a business savings account. If you’re a sole trader, at least have a separate savings account that you can show is only used for business-related costs. If you have business savings and the DWP or local authority take them into account as part of means-testing, you have the right to apply for a reconsideration if you can provide additional proof. For example, if you can show that you have £3,000 set aside in an account, and your tax bill last January was £2,500, this is evidence your cash is a business saving. However, if you’ve just shifted your savings into a business account to exempt yourself from means-testing, this is potential deprivation of capital and could mean you won’t qualify at all.
Now you know how your savings will affect your benefits, it might be tempting to get a little creative with your assets. You might decide to gift money to your children, for example. However, if this means you struggle financially as a result, that’s called Deprivation of Capital. Means-testing authorities who think you have deliberately deprived yourself of capital to access benefits can take into account the amount you’ve given away and treat it as if you’ve still got the money.
This also counts for things like spending a lot of cash on a new car or similar asset (buying your primary residence does not count). You must show you needed the vehicle. For example, if you buy a van as part of your delivery job. Of course, sometimes big expenses come up – such as needing to replace your boiler when it breaks in winter. As long as you can prove you legitimately spent your savings on something that was necessary for your work or basic human rights (i.e., ensuring you have running water and heat), then you’ll be alright.
DWP disregards lump sum payments for damage repair for six months. You must show you are working to repair the damage, though.
If you receive a pay-out because you’ve had an accident, and now claim benefits because of the accident, the person paying the compensation to you must inform the DWP. They need to pay back the amount of benefit you’ve received as a direct result of the accident. They pay the DWP direct. This could reduce how much cash you receive.
When you’re on benefits, it’s a hand-to-mouth existence. It’s very difficult to find enough cash to cover your monthly expenses, let alone think about saving. However, we have a ton of tips in our latest free eBook, How To Save, even if you’re on a really tight budget. It’s surprisingly easy to find ways to access free cash!
You might also benefit from finding alternative ways to earn extra cash. Try these articles for inspiration – and put the earnings aside into a savings account when you can.