Will changes to the benefit system affect trust deeds?

28th February 2011

The UK government has announced that most current types of benefit are to be replaced with a ‘universal credit’. The main goal is to ensure that anyone who commences paid employment will be in a better financial position than they were previously. The long-term aim is to detract from individuals relying on income benefit alone.

Although the move is expected to decrease the number of unemployed, there will also be an effect on those individuals who are currently employed, yet still receive certain types of benefit income. Changes to the benefits they receive will have a major impact on their ability to fund a new trust deed, or continue payments to an existing protected trust deed. Tax credits are a prime example.

Single parents may be one group to benefit. The proposals will enable them to be more flexible in the number of hours they work. There are currently certain ‘penalties’ which can reduce the amount of benefits received if they work too many or too few hours. This will result in an increase in the disposable income of many single parents. This may lead to an increase in the number of debt solutions available, including trust deeds, should debt be a problem in the household. Increased income is also likely to help single parents avoid unmanageable debt in the first instance.

The newly and slightly condescendingly entitled ‘squeezed middle’ are not due to benefit in the same way. Many such families in this bracket benefit from tax credits. These can form a substantial element of the disposable income they have available to fund debt repayments or trust deeds.

The Resolution Foundation has investigated the government’s proposals, reporting that those individuals currently receiving tax credit income, who earn a reasonable income, will only benefit to the tune of 24p in the pound if they increase their income. Currently the figure is 30p. This may create less of an incentive for individuals to improve their financial position through promotion, overtime or earning a bonus.

The ‘squeezed middle’ may therefore find it more difficult to increase their disposable income. This makes it less likely that they will be able to support growing debt repayments, resulting in an earlier requirement to enter into a method such as a debt management solution.

The Resolution Foundation also reported that 40% of people are currently in debt, have gone further into debt or expect to go into debt this year due to the current economic crisis.

For trust deeds information and advice from leading industry figures, as well as support from individuals who have found themselves in a similar situation, look towards our trust deed forum.

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