Poor pay more than wealthy for utilities

gas meterUtilities and financial services markets favour the wealthy and hurt the poor, with the poorest households in the UK paying 10p in every £1 more for essential goods and services than the better off.

That's according to a report called Addressing the poverty premium by Consumer Futures and the Joseph Rowntree Foundation.

Low-income focus

The report calls for regulators to put the needs of low-income consumers at the centre of their thinking about whether markets are working well and to develop and implement Consumer Vulnerability strategies to focus their efforts for consumers.

People on low incomes are in a weak position in any market, it argues. This is not just because they have less money. They also lose out because of the way that firms construct products and tariffs, because of the extra costs of paying off line and not having direct debit banking. Some consumers use payment methods, such as pre payment meters, that cost them more because they are wary of getting into debt given the cost of credit.

Although some of these consumers can be "costlier to serve" than others, the report finds that extra charges applied cannot always be justified and that regulators should focus on making firms drive down costs for these consumers. I wants firms to reflect efficiencies in fairer prices and help all consumers access the best value deals in their markets.

Consumer Futures and the Joseph Rowntree Foundation want regulators to
  • develop coherent strategies to tackle consumer vulnerability in their markets by spreading the benefits of competition to all consumers
  • take a fresh look at fairer trading and pricing in these markets, and
  • work with governments to build a genuine cross market approach to consumer vulnerability

Poor and vulnerable

Mike O'Connor, chief executive of Consumer Futures, says: "Consumers who are poor or vulnerable may always be with us but we can do more to make sure that markets do not make their position worse.

"The extent to which essential services meet the needs of low-income consumers is a basic test of the success or failure of markets. It is a test that has been failed too often and for far too long.

"Consumers should be able to access essential services at affordable prices and with appropriate level of service. If essential markets do not deliver accessible and affordable services to consumers on low incomes, then regulators, working with governments, need to intervene to make markets fairer or target support packages to make sure everyone has the essentials of life.

"The cost of many essentials such as energy and water are likely to rise and whilst we hope for a tide of economic growth which will lift all, poverty and vulnerability is not going to go away and indeed many people who are not seen as "poor" will struggle to meet household bills.

"Low income households need to spend between a fifth and a third of all outgoings on utilities and on buying larger items that they are most likely to purchase on credit. This research shows that paying higher prices for utilities and credit can raise the cost of a minimum household budget by around 10 per cent.

"These can be complex issues and regulators and Government lack a common framework to understand how the poverty premium manifests itself and what they can do about it.

"This report can help establish a shared approach to a stubborn issue that quite simply will not go away by itself and needs determined and focused action by markets, regulators and governments."


Donald Hirsch, director of the Centre for Research in Social Policy at Loughborough University, says: "People on low incomes can be doubly disadvantaged by having to pay above the odds for essential services and credit - making it even harder to make ends meet. Some regulators have started to recognise that disadvantaged households can be poorly placed to benefit from the market.

"Where this is the case, they may need additional protection, or regulators may need to take extra steps to create a level playing field.

"This report shows that the stakes are high for low income households: higher prices can substantially lower their living standards to well below an acceptable level. The challenge that this raises for all regulators is to look systematically at outcomes for low income groups, and where markets have failed them, to consider what additional protections are needed."

Katie Schmuecker, policy and research manager at the Joseph Rowntree Foundation, adds: "The poor pay more may be a well-worn phrase, but this report drives home the very real impact of the poverty premium on the living standards of low income families. Households on low incomes already fall short of achieving what the public think is an acceptable standard of living - the poverty premium further compounds this, risking increased poverty and hardship."


  • The estimated household budget, excluding rent, for a single person is £193 a week.
  • The total cost of utilities in the research is £38 a week on the high fuel use model - of which £23 fuel, £10 communications and £5 water.
  • Existing evidence suggests that the poverty premium can cause the household to pay 20% more, which is nearly £8 on all utilities.
  • The total spending on credit items is £23 a week, of which they can end up paying £11 in surplus interest.
  • This brings the total poverty premium to £19, ie 10% of the normal minimum household budget.

Four types of poverty premium

  • Paying higher than average utility tariffs for a given amount of consumption, either because of the payment method (such as quarterly billing or prepayment) or because of being on a 'sub-optimal' deal. The evidence shows that people on low incomes are particularly impacted by these tariff effects, and generally have not proved successful or are excluded as consumers in a competitive market from getting the best deals.
  • Paying more per unit of consumption because of being a low user. This is especially an issue in telecommunications, where tariffs are increasingly structured around inclusive packages, and it has become harder for people on modest means to meet basic needs at much below the average price.
  • Paying more because of limited financial and communications capabilities. People on low incomes often have limited choices how to buy things, and if they are not online or do not/cannot pay by Direct Debit, they can end up paying significant premiums.
  • Paying high interest on consumer credit. In purchasing essential goods on credit, some low income consumers end up with much higher bills because of high effective interest rates, and the evidence shows that this premium can be much greater than what can be justified by the additional risk of lending to them.
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