Benefit trap for the middle class

Aserious "earthquake" shook the welfare state this week when on Monday unemployment benefit, one of the traditional cornerstones of the social security system, was abolished and replaced by the job seekers' allowance (JSA).

The new benefit is a further example of the Government attempting to reduce social security spending, particularly on middle income earners, and target benefits to the most needy. It follows the reduction a year ago in income support in respect of mortgage payments for homeowners who lost their jobs.

But what does the introduction of JSA mean and how does this effect the provision we should be making against the consequences of losing our jobs?

The introduction of JSA will further reduce the state benefits of many people who experience unemployment. According to the Department of Social Security over 50,000 people a year will receive lower benefits than under the old system.

Instead of the payments lasting for 12 months, as with the old unemployment benefit, JSA will only be paid for six months automatically. If claimants are still out of work after those six months, they will be means tested to determine whether they are still eligible to receive JSA.

Individuals with assets and capital of more than pounds 8,000 (excluding the home) will not receive any JSA after six months and those with savings between pounds 3,000 and pounds 8,000 will only receive partial JSA benefit.

Secondly, after six months even those who are still eligible could have the benefit withdrawn if it is considered they are not making a "positive" effort to find a new job - for example, turning down a job because the pay is too low would not be justifiable.

Thirdly, the maximum weekly JSA of pounds 47.90 is now lower than the previous unemployment benefit, and for under 25-year-olds the benefit is even lower at pounds 37.90 a week. There will be no escape from the Inland Revenue either as these benefits are taxable.

In theory anyone facing the possibility of losing his or her job should try to build up an emergency fund in a deposit account which could meet outgoings for at least three months, the average period that an average income earner is out of work.

Another consideration would be unemployment insurance, for example in respect of mortgage payments or loan commitments. Many mortgage lenders now offer mortgage payment protection plans which will pay mortgage interest payments for a year if policyholders lose their job, for a monthly premium of around pounds 6 for each pounds 100 of monthly interest insured. Other policies cover mortgage payments for up to two years and some offer cover for other essential living costs.

However, while such actions would provide some peace of mind, the means testing system for benefits such as JSA does very little to encourage such private provision, and if anything acts as a disincentive.

For example, while the new JSA may prompt more of us to put some savings aside to tide over any unforeseen periods of being out of work, the irony is that those people who do save, with say a Tessa or PEP, will find their entitlement to JSA is reduced once the value exceeds the means test capital threshold of pounds 3,000.

Although the value of any money held in a pension or life assurance policy would not be taken into account, if you are fortunate to receive a lump sum of redundancy payment this would be taken into account through the means test and could disallow any entitlement to JSA after six months.

Furthermore, even those who forward plan and take out unemployment insurance may find that some of the insurance benefit is taken into account in determining eligibility for means-tested JSA.

Mortgage insurance payments are disregarded by the DSS for the means test if they specifically meet the cost of mortgage interest, but any excess payments which cover such items as endowment and life assurance premiums may not be and could affect entitlement to JSA.

So although the Government is using the "stick" of restricting social security benefits for the unemployed to encourage us to fend for ourselves more, there is a severe lack of "carrot" to encourage more private provision through savings or insurance.

However, it is vital that we do not just sit on our hands. If you are made unemployed you should not be discouraged from signing on by the limited benefits on offer, as you may at least be entitled to National Insurance credits which go towards your future state pension entitlement.

Ultimately, private provision, whether through long-term savings or insurance, is the only true way of being assured of some financial protection in the event of losing a job and will offer greater flexibility and choice than relying on the limited state benefits and conditions of the JSA.

The TUC's recent report on the JSA concludes: "Many middle class people are being frozen out of the welfare state at a time when they are more likely to need it." The changes are yet another clear indication from the Government that in in future most of us will need to rely on our own arrangements to tide us over the unforeseen events such as unemployment, particularly if we are enjoying average or above-average earnings while working and have built up some savings.

Stephen Ingledew is development director of Frizzel Life & Planning, a subsidiary of the Liverpool Victoria Group.