Perverse Anti-Pension Incentive in Universal Credit

Instead of an hours-based exclusion from the benefits cap, as will be the case for the Housing Benefit based cap being introduced in April 2013. there will be a simple earnings threshold. If net earnings are higher than this figure, for single people or couples, then they will not be subject to the cap. The draft Universal Credit regulations put this “earnings figure” at £430 a month or £99.23 a week.

In many ways, this threshold based cap introduces more complexity than the hours ‘step’ that will now apply to the current scheme as changes in rates of pay or hours of work may trigger, or stop, the cap applying.

Given the relatively low threshold figure then, while the cap may apply to fewer people, those affected may be more likely to include those on the periphery of employment, often dipping in and out of work, who were intended to be helped by Universal Credit’s smooth and seamless operation. People in lower paid jobs could be hit by the cap while those, working the same hours on higher rates of pay, would escape; a better-off bonus of sorts.

It also produces, for some, perverse incentives. As the cap may be escaped by those with net earnings above the threshold figure, there will be some who will be better-off by increasing the net earnings level without increasing their actual earnings, in order to exceed the threshold. The simplest way to do this will be to reduce contributions to a pension scheme. These contributions will receive a 100% disregard from earnings under Universal Credit so that increased payments into a scheme will normally mean lower net earnings and higher Universal Credit . While decreasing, or ending, contributions will increase net earnings, and reduce Universal Credit, the avoidance of the cap may make that drop in benefit level very worthwhile in the short term (but not the long).

The result may be that some of the poorest working people in the country will see one part of government encouraging them to increase pension provision, through such initiatives as stakeholder pensions and automatic enrollment, due to begin later this year, while the benefit cap pushes them in the opposite direction.

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