Families on the financial high-wire with no safety net

The Money Advice Service has warned that poor financial know-how and unwillingness to confront worst-case scenarios mean many households are just “one step away” from financial disaster should they lose their main source of income.

Official statistics released this week showed that the number of full-time employees in Scotland fell by 12,000 this summer. This puts the unemployment rate north of the border at 5.9 per cent, higher than the UK average of 5.5 per cent.

But MAS found that only 35 per cent of people had the right insurance policy to tide them over if they had to leave the workforce due to sickness or injury.

It also discovered that 28 per cent of consumers believe they cannot afford income protection policies, a vital means of replacing lost earnings.

A basic income protection policy typically costs £20 a month for a 30-year-old male non-smoker, paying out a monthly tax-free sum £1,500 for up to two years after four weeks of incapacity. But a quarter of households spend roughly the same amount each year on insuring their pets, according to research earlier this year from Drewberry Insurance.

Andy Webb, money expert at the Money Advice Service, says: “The research highlighted that there is a big gap between the number of people who experience financial shocks, and those that protect their lifestyles by either saving for a rainy day or considering the relevant protection insurance.

“Many of us find it difficult to comprehend the thought of illness and death and we may be tempted to put safeguarding our finances to the back of our minds.”

One reason that many families are hit hard by illness in particular is that sick pay is often inadequate. Statutory sick pay is available for all workers for up to 28 weeks, but Drewberry has warned that 58 per cent of ill or injured workers would get nothing from their employer beyond three months. Moreover, the majority (55 per cent) said they would use up their savings in just three months.

Experts also warn that state benefits may not be a silver bullet for those grappling with long-term health issues. In May this year, the government admitted that there are currently 78,700 people waiting to hear if they can claim personal independence payments (PIPs), which help disabled and severely ill people with extra costs. Of that number, 3,200 have waited more than a year to have their claims processed, and 22,800 have waited more than 20 weeks.

Even when PIPs and the Disability Living Allowance are eventually provided, the amount may not be enough. The disability charity Scope has found that sick people who are unable to work typically require £550 a month for extra living costs, but only £360 is met by these two state benefits. Tom Connor, director of Drewberry, warned that the average household would need to halve their monthly spending to survive solely on state benefits once their savings and sick pay had run out. "Unless a family has other income streams to help them they will need to dramatically slash their expenditure. That could mean taking drastic action to reduce debts such as selling the family home."

The Association of British Insurers also provided reassurance recently that the vast majority of people claiming on their income protection policy - 92.9 per cent - received their payouts last year, typically worth £39,200 and lasting 204 weeks.

Peter Le Beau of the Seven Families campaign said: “Benefits such as Employment Support Allowance and Personal Independence Payment are there to help support people unable to work long-term due to ill health. However, many people would see a significant decrease in the amount of money coming in compared to when they were working, which could mean they struggle to meet their basic financial commitments, such as rent or mortgage payments, food and utility bills.”

According to research by protection specialist LV=, nearly 11 million UK workers say they are not eligible for company sick leave, meaning that they would have to fall back on Statutory Sick Pay (SSP) .

A quarter of the UK workforce - equivalent to nearly eight million UK workers- are employed by a company but would only receive SSP if they fell ill. Workers who have to rely solely on SSP face living on £88.45 per week, more than £300 less than the average UK worker’s weekly take home salary of around £409.

Around one in 10 workers in the UK are now self-employed so would not receive any pay if they were ill.

But a survey earlier this year by low-cost income protection provider British Friendly found lack of trust in insurers was a major issue. Only two per cent of respondents guessed correctly that 90 per cent of income protection claims are paid out. Almost half believed that claims were routinely rejected because insurers try not to pay out. The perceived cost was also a concern, with 30per cent citing it as the main offputting factor.

Mr Le Beau commented: “The government is wrestling with the balance between societal and personal responsibility, but whatever happens we can be certain that some element of personal responsibility will be needed. Income protection is a way to safeguard the things important to people, and includes not only financial support but physical and emotional support such as rehabilitation, physiotherapy and counselling. Many people say this is as important, if not more so, than the financial benefit received. This support during a difficult time can help people get back to a productive future.”

CASE STUDY

IN 2013, Aberdeenshire policewoman Nikki Thornley was paralysed after a motorbike accident as she was heading on holiday with husband Phil. She was in rehabilitation for nearly a year at the National Spinal Unit in Glasgow and was not eligible for sick pay as she was on a career break at the time.

Wheelchair-bound Nikki has received Personal Independence Payment with the mobility component, but says: “I would urge anyone to take up something independently of work, because life just gets in the way, and you don’t always think of such things until it’s too late.”

However the Thornley family is now receiving a £1000 tax-free cash injection from the Seven Families Campaign, a coalition of 20 insurers and a leading disability charity. Nikki added: “This money enables us to keep our head above water, especially with all the additional outgoings connected with our house. I’m so grateful to have had the opportunity to get involved with this project.”