House of Commons - Treasury - Written Evidence

Select Committee on Treasury Written Evidence

Memorandum submitted by One Parent Families

SUMMARY

— Lone parents are more financially excluded than other family types.

— Progress has been made around access to bank accounts, but lone parents remain less likely to have a bank account than other groups. More action is needed, and it must be borne in mind that Basic Bank Accounts may not be appropriate for all.

— Lone parents' greater risk of poverty means that they are more likely to have problems accessing affordable credit. The most important action Government could take in this area is to invest in, reform and expand the Social Fund.

— We welcome the Government's commitment to providing additional face-to-face advice. Advice is needed not only on issues specifically related to financial exclusion such as debt, but also on general sources of income for many lone parents such as benefits and tax credits, and on how these may be affected by relationship breakdown or moves into work.

— The most important barrier to lone parents saving is poverty—and reducing this poverty will be the most effective means of encouraging saving. However we have been encouraged by the early findings of the Savings Gateway and look forward to the results of further pilots.

— Poverty in fact lies at the root of much of the financial exclusion faced by lone parents—albeit financial exclusion can in turn exacerbate poverty. Efforts to tackle the two must be interlinked.

1. INTRODUCTION

1.1 One Parent Families is the leading charity representing the 1.8 million lone parents, and their children, in Britain today. One Parent Families believes we can build a fairer society for all families, in which lone parents and their children are not disadvantaged and do not suffer from poverty, isolation, or social exclusion. The charity provides a platform for lone parents, to enable them to have a voice through our policy and campaign work; offers information and advice lone parents can trust, through the telephone, our publications, through our website and special events; acts as a centre of expertise, and works with others to improve services, raise awareness and change attitudes.

1.2 Lone parents remain the poorest family type in Britain, and are particularly vulnerable to financial exclusion. They tend to use fewer financial products such as insurance, credit, savings and bank accounts than couples with children.

Table 1. Number of financial products by household circumstances: Lone parents and couples with children

Household type	None	Low	Medium Low	Average	Medium High	High	Weighted base
Lone Parent	23	42	17	7	7	4	1,790
Couple with children	3	11	14	10	27	35	5,861

Source: adapted from Table 2: Numbers of household products by financial circumstances from Kempson E (2002) Life on a low income: An overview of research on budgeting, credit and debt among the "financially excluded" in ESRC (2002) How people on low incomes manage their finances ESRC.

1.3 Research shows that lone parents are less well provided for than other family types in terms of both current accounts, and insurance. While 95% of couple families have a current account, this figure is only 80% for all lone parent families, and 67% for those lone parent families where the parent works less than 16 hours a week.[219] Lone parents are also less likely than other household types to have insurance. In 2004 only 50.6% of one adult households with dependent children had home contents insurance compared to a national average of 78.2%; for life insurance the figures are 32.7% for one parent families compared to 50% for the nation as a whole.[220]

1.4 A major explanatory factor for this exclusion is poverty. 47% of individuals in households headed by a lone parent are poor.[221] Recent research found that financial exclusion was most common amongst the parents of children who were poor: while 10% of children overall lived in households where their parents didn't have access to a bank or building society account, this figure was just 1% for non poor children, compared to 44% for those children who were severely poor.[222] This may be partly because those living on a low income may prefer to manage their money in cash to allow greater control over a tight household budget.[223] But low income also constrains the extent to which people can afford financial products such as insurance. Research in 2001 found that two thirds of lone parents said they could not afford to save (at least £10 a month) and half that they could not afford home contents insurance—as reflected in the figures above.[224]

1.5 The fact that nine out of ten lone parents are women may also contribute to their exclusion. Research focussing on distribution of income within the household for families receiving benefits has found that while women may often be in charge of managing a day-to-day budget, men are more likely to have overall `control' of the finances.[225] This means that following divorce or separation, women may not previously have held an account in their own name, or having previously held joint accounts may believe that they will not be able to open an account on their own.[226] Those women who are able to negotiate staying in the family home post separation, often do so at the expense of giving up their share of joint financial assets such as investments, pensions and savings, and so in addition to the loss of income that usually follows separation, they also reduce their use of financial products.[227]

1.6 Tackling poverty must be at the root of any efforts to improve the financial inclusion of lone parents, and although Government has made progress in this area, there remains a long way to go. Progress has also been made in recognising financial inclusion as a problem—but again more action is needed. Most importantly reform of the Social Fund is now urgent. We published proposals for Social Fund reform in 2003—and remain convinced that action in this area would be the most effective way of tackling financial exclusion—as well helping the Government meet its target to halve child poverty by 2010.

1.7 In the rest of this submission we discuss the areas suggested by the committee where we feel we can usefully comment.

2. ACCESS TO BANK ACCOUNTS

2.1 As set out above, lone parents remain less likely than other families to have a bank account—although good progress in this area has been made. In 2003, 80% of lone parents, and 67% of those lone parents working less than 16 hours a week, had a bank account compared to 72% and 51% respectively in 2002.[228] Part of this improvement is due to the Government's policy of paying benefits directly into bank accounts, and the fact that they have now met their target to pay 85% of their customers by this method.[229]

2.2 We also welcome continued progress in promoting the take up of basic bank accounts, particularly the adoption of a target for Government to work together with the banking sector towards a goal of halving the number of adults without a bank account. Further action in this area for lone parents is clearly needed. While the latest `mystery shopper' survey of basic bank account providers (published in November 2005) shows that improvements have been made in staff training and in the provision of information about basic bank accounts, it also reveals that there remains a problem with identification requirements for those wishing to open a basic bank account, and that more still needs to be done to ensure information about the accounts is clearly displayed. It also found that accounts were taking a long time to process and that there were inconsistencies around credit reference checks.[230]

2.3 Basic Bank Accounts themselves however may not be appropriate for all lone parents. Those who occasionally rely on a third party to collect their benefits—for example if they are carers—are unlikely to be willing to trust someone else with their card and pin number. The inability to take out less than £10 from many cash machines is also a problem for many customers. Moreover for those living in socially excluded or isolated rural areas, cash machines may not be easily accessible, or only machines that charge may be available. For those living on a limited income this can leave the choice of forfeiting cash each time they need to withdraw money, or alternatively having to pay for transport to reach a bank branch where money can be withdrawn over the counter.[231] We remain concerned about the availability of free cash machines in deprived and rural areas, as discussed in the Committee's report.[232] If bank accounts are to work for those living on the lowest incomes, charges for all cash machines must be reviewed and more may also need to be done to encourage the mainstream banks who do not charge for cash withdrawals to reintroduce services into isolated and socially excluded areas.

3. ACCESS TO AFFORDABLE CREDIT

3.1 The problem of access to credit for those on a low income is now well documented. As Kempson and Collard state in their 2005 report into "Affordable credit for low income households", "access to credit is still severely constrained for people on low and insecure incomes, and they often have to borrow at APR's typically ranging from 100 to 400%."[233] Moreover, they warn the situation is likely to get worse, as those companies which will lend to low income customers use increasingly sophisticated methods of assessing the risk and costs this entails and withdraw from the market.

3.2 Lone parents' greater risk of poverty means that they are more likely to use credit than other families, and more likely to use those types of credit associated with low income—and high costs. Kempson, Willits and McKay found 75% of lone parents were using credit compared to 68% of all families with children although they generally had fewer credit and tended to owe smaller amounts; 80% of lone parent families owed less than £1500 compared to 62% of couple families.[234] The two most important sources of credit for lone parents however were both high cost—mail order catalogues and loans. The DTI's overindebtedness survey showed there were significant differences in credit use between couple and lone parent families. Whilst three quarters of two parent families had borrowed from a bank or building society, around half of lone parents had borrowed from the social fund, and a quarter had taken out a loan from a doorstep lending company.[235]

3.3 Measures to increase the affordability of credit are therefore particularly important for lone parents. Government has currently suggested that access to credit may be expanded by the introduction of a scheme where, in certain circumstances, private and third sector lenders could apply for repayment to be made by deduction from benefit, in order to reduce the costs for such lenders. We think there may be advantages to such a scheme, as it provides some certainty for borrowers as well as lenders, many of whom want to minimise the risk of default. However, we agree with Citizens Advice that certain conditions would have to be met before such a scheme was implemented, including:

— "all claimants with multiple debts should first have access to independent advice on the debts to help them make equitable payments to all their creditor and identify strategies for managing the debts in other ways. The provision of advice should be integral to the scheme and properly funded.

— The loan product would have to be on a pre-approved list and lenders would have to sign up to a list of conditions to offer such loans.

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3.4 Interestingly, Kempson and Collard looked at the feasibility of this scheme and concluded that it would be preferable to introduce an improved direct debit system, which would trigger payments on receipt of wages into a bank or building society account. We think that this option should also be seriously considered before any introduction of a third party deduction scheme.

3.5 There is also a need for urgent reform of and investment in the Social Fund. We believe that action in this area is the measure that could do most to promote access to affordable credit and financial inclusion. Two recent reports funded by the Joseph Rowntree Foundation have concluded the same. Kempson and Collard state that:

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A report by researchers at the National Institute of Economic and Social Research into poverty and debt similarly concluded that:

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3.6 One Parent Families has long argued that reform of the Social Fund is essential to tackling poverty. While we welcome the reduction in repayment rates and the abolition of the double debt rule for Budgeting Loans, much more is needed. In 2003 we published a report, in conjunction with the Child Poverty Action Group and Family Welfare Association, which recommended a three stage reform process, as follows:

Stage 1:

— Include some of the items currently excluded from the social fund such as home improvements, deposits to secure accommodation and school uniforms.

— Amend the legislation to allow for a national budget for loans to remove the postcode lottery.

Stage 2:

— Introduce a Child Development Grant payable either through the Social Fund or Child Tax Credit at key stages of a child's life that generate additional expenses. Our research showed that older children were particularly likely to lack essential items; DWP research also suggests that a child reaching the ages of both 3 and 5 are likely to trigger a need for lump sum payments.

— Introduce Child Health and Safety Grants to meet the core items essential for a child's health and safety, such as bed/bedding, cooker, fridge, heating equipment and repair or replacement of gas or electrical items. The grants would be administered via Jobcentre Plus and paid to families with incomes low enough to qualify for the maximum Child Tax Credit and who can demonstrate need.

— Introduce Secure Homes Grants providing lump-sum payments for core items needed after rehousing to help people fleeing domestic violence, relationship breakdown or homelessness.

Stage 3:

— Test out ways to reduce arrears, especially for lone parents entering work. Options include developing Debt Buy Out Loans. These would involve consolidating existing debts into one and taking out a loan with reasonable repayments to pay it off (although the current rules on charges for early settlement of loans may need to be revised in order to make this effective). Currently, the amount that is deducted in benefit for Budgeting Loan repayments to the Social Fund can significantly reduce the weekly income available to meet clamaints' other needs. Another option is to consider a debt amnesty for existing Social Fund debt on return to work.

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3.7 We also think that access to the Social Fund should be extended to those claiming Working Tax Credit, as those in low-income work may also be excluded from sources of affordable credit. As Kempson and Collard point out, significant additional funding will be required.

3.8 We are also concerned that under the current scheme, those who lose eligibility to income related benefits when they are transferred to tax credits will also lose entitlement to the Social Fund, despite being on the same level of income. Government have chosen to transfer access to other passported benefits (such as free prescriptions) to an income test rather than a benefit test—we think it should also take this approach in the case of the Social Fund.

4. FINANCIAL EDUCATION AND ACCESS TO FINANCIAL ADVICE

4.1 We welcome the Government's commitment to funding increased face-to-face financial advice, as set out in the 2004 Pre-Budget Report. We also welcome the announcement in Pre-Budget Report for 2005 that they "will encourage local authorities to provide more financial education to parents through Sure Start children's centres and locally delivered family numeracy programmes."[240]

4.2 Such advice is badly needed. Lone parents are particularly vulnerable to debt and research found that in 2002, 48% of lone parent families had been in arrears in the past 12 months, compared to just 25% of two parent families.[241] Moreover the DTI's recent survey on over-indebtedness found that: "Single parents… are significantly over represented on the arrears and burden indicators. This group accounts for 9% of the sample but makes up 31% of those in arrears and 24% of those declaring their household's borrowing a burden."[242] Advice on these debts is clearly an area of unmet need. One Parent Families' recent research report into the advice needs of lone parents found that debt was one of the most frequent problems dealt with by lone parents; 48% had dealt with debt problems, and 62% of this group said that these problems had lasted over a year.[243]

4.3 We recently ran a focus group with lone parents, in preparation for financial literacy training that One Parent Families has been funded by the Basic Skills Agency to deliver. Lone parents told us that the areas where they felt they would benefit from a financial literacy course were:

— Information about benefits, particularly tax credits and pass-porting of benefits

— Making money go further, eg saving money through paying bills by direct debit and using internet banking

— Budgeting, eg aligning direct debits with wage payments but also budgeting without a bank account

— Borrowing, including:

Different options

Strategies used by lenders, what to look out for

Difference between store, credit and debit cards

Debt solutions, different forms/timings of repayment

Numbers for debt counselling organisations

Information about fines and court procedures

— Transition points: moving into work, children turning 16 or 19, increasing work hours

— Collating information in easy English in a folder which lone parents can take away

— How to feed kids food that is healthy and will be eaten on a tight budget.

4.4 The focus group highlighted that there is a need for general advice about sources of income, such as benefits and tax credits—as well as about specific financial products. Our previous research also found that these posed considerable problems, with 69% of participants dealing with problems in this area, and these translating into significant problems for one third of all participants.[244] We also think there may be a particular need for advice around finances when moving from benefits into work. Many lone parents call our helplines at this point and are very worried about how they will manage the transition, and research suggests that for low-income families, debts and arrears may actually increase at the point of moving into work.[245]

4.5 Finally, we think there may be a particular need for advice at the time when couples separate. When lone parents in debt were asked what they attributed their problems to, 27% cited relationship breakdown.[246] We also know that, following separation or divorce, mothers and children usually see a fall in their income of about £20 a week.[247] Many lone parents we speak to on our helplines at this point have never dealt with a building society, do not know what is available to them in terms of benefits, tax credits, child support or other help that might enable them to stay in their homes, when there is mortgage debt or creditors with a charge on the property.

5. INCENTIVES AND BARRIERS TO SAVING FOR PEOPLE ON BELOW AVERAGE INCOMES.

5.1 Lone parents are again disadvantaged in the area of savings; fewer of them save regularly, and they hold much smaller amounts. Whereas 49% of couple families save regularly this is the case for only 22% of lone mothers, and only 14% of lone mothers working less than 16 hours a week.[248] Lone parents therefore have much fewer savings—64% of one adult families with children have none at all (compared to 29% of two adult families with children) and only 9% have more than £3,000 (compared to 26% of two adult families with children).[249]

5.2 The major barrier for lone parents to saving is simply not having enough money to put aside. One study found that two thirds of lone parents said that they could not afford savings of £10 a month towards retirement,[250] and research looking at savings and life events found that people's view of their own financial situation was by far the most influential factor in explaining savings behaviour.

5.3 While 43% of those in this research who said that they were "living comfortably" were saving regularly, savings went down as financial stress increased, with only 3% of those who were financially "finding it very difficult" able to make savings.[251] Income itself also had a substantial effect—12% in the poorest fifth of the population were saving regularly compared to 47% in the richest fifth. The amounts saved were also very different, ranging from £40 a month in the poorest fifth to £150 in the richest.[252]

5.4 Research also shows that families with children do make savings when they can afford to do so, but that living in poverty restricts their ability to save. Looking at evidence from the British Household Panel Survey over a five year period, research for Save the Children found that while 65% of children had parents who had managed to save at some point, only one in ten had managed to save every year. The more the experience of poverty, the less likely parents were to save, with three fifths of children who were living in persistent poverty having parents who were unable to save in any of the five years.[253]

5.5 The best way to increase savings therefore, would be to increase incomes. Research into the experiences of low income families' transitions between work and benefits found that while few were saving when they were on benefits, "those who have sustained work, who managed the income derived from that well, and who have reduced or avoided debt, had begun to show signs of increased ability and willingness to save."[254] The Government's Saving Gateway pilots also seem to indicate that providing incentives to save (through matched savings) can be effective. Evaluation of the initial pilots found "that a high proportion of participants said that they felt more in charge of their life and, in particular, felt more secure financially" and moreover that participation in the pilot appears to have changed people's attitudes to saving.[255] We look forward to the results of the further pilots announced in Budget 2005.

6. THE BENEFITS OF FINANCIAL INCLUSION AND THE EXTENT TO WHICH FINANCIAL INCLUSION MEASURES CAN CONTRIBUTE TO COMBATING POVERTY AND REDUCING BARRIERS TO EMPLOYMENT

6.1 Poverty lies at the root of many of the problems faced by lone parents. Low income, and the drops in income that follow separation or divorce are key factors that explain the higher number of problems faced by lone parents. Policies that enable lone parents to combine work and family life effectively, and that ensure that work pays will be vital to address this low income, as will policies that that protect women from sharp income drops following separation or divorce. These include the introduction of universal childcare, improvements in the level of the child tax credit, and improvements to the National Minimum Wage. Such policies must be the basis of any attempt to improve lone parents' personal finances and also meet as well as meeting child poverty targets.

6.2 But policies that help families to manage their finances more effectively can make a difference. The research with low income families found that financial skill significantly contributed to increased well being when families found work- or helped to mitigate the effects of losing a job: "The level of income derived from work is undoubtedly a driving force of many of the financial circumstances of the families concerned. However, while it is a key ingredient in financial well-being it is not the only one. Good financial skill remains as important in the longer term as it was in the initial stages of work. How the two elements combine can lead to very different experiences of household expenditure, debt and savings, which in turn have ramifications for a household's material circumstances and general living standards."[256]

6.3 The researchers found that access to financial services helped to increase financial skill—and promoting this can therefore contribute to a strategy for reducing poverty. Most important in this area is a reform of the Social Fund, which has the potential to make a real difference to the lives of lone parents and others on a low income.

January 2006

219 Barnes M, Lyon N, Morris S, Robinson V and Wan Yau Y, Family Life in Britain: Findings from the 2003 Families and Children Study (FACS) DWP Research Report 250. Back

220 Figures supplied by the Association of British Insurers, as of 19/07/2004. Back

221 DWP (2005) Households Below Average Income 1994/95-2003/04 DWP. Back

222 Adelman L, Ashworth K, and Middleton S (2003) Britain's Poorest Children: Severe and Persistent Poverty and Social Exclusion Save the Children: London Back

223 Thomas A and Pettigrew N (1999) Attitudes Towards Methods of Paying Benefits. DSS In-house Report No 51. DSS: London Back

224 Middleton S (2002) Coping for the children: Low income families and financial management in ESRC (2002) How People on Low Incomes Manage their Finances ESRC: Swindon op cit. note 9. Back

225 Goode G, Callendar C and Lister R (1998) Purse or Wallet? The distribution of income within families receiving benefits Policy Studies Institute: London Back

226 Kempson E (2002) Life on a low income: An overview of research on budgeting, credit and debt among the `financially excluded' in ESRC (2002) op cit note 9. Back

227 Perry A et al (2000) How Parents Cope Financially on Marriage Breakdown FPSC: London. Back

228 Barnes M, Willits M, Anderson T, Chaplin J, Collins D, Groben S, Morris S, Noble J, Phillips M and Sneade I (2004) Families and Children in Britain: Findings from the 2002 Families and Children Study (FACS) DWP, CDS: Leeds. Back

229 DTI, DWP and DCA (2005) Tackling Overindebtedness Annual Report DTI. Back