It has long been recognised that people experiencing poverty face a range of social penalties – including stigma, exclusion and low status. But there has been little acknowledgement of the financial penalties that exist, and result in poor families paying more for a range of basic essentials.

The Poverty Premium, a new report by the Family Welfare Association and Save the Children, attempts, for the first time, to quantify the additional costs that poor families bear in acquiring cash and credit, and in purchasing goods and services. It finds that the average low-income family faces an annual poverty premium of around £1,000 – 9 per cent of the disposable income of an average size family living on a low wage.

Take, for example, the cost of a white good such as a cooker. While the cost of consumer goods has reduced significantly in recent years, many low-income families can neither afford to pay for items up front nor do they have access to the range of affordable credit schemes available in the marketplace. This leaves them with little choice but to rely on ‘sub-prime’ credit shops and high-cost mail order catalogues. These options disregard credit history but goods have high APRs and mark-ups on retail prices. The result is that a standard cooker, available on the high street for £159.99 cash, costs £405.00 when bought from Brighthouse and paid for over 125 weeks.

Despite the expense of sub-prime credit shops, and the high charges and repossession that result from missed payments, these options are popular with people on low incomes because of lack of access to better value mainstream alternatives.

Low-income consumers find themselves paying more because of the way they pay for services. For instance, the need to keep to a tight budget means that poor families are more likely to opt for pre-payment meters to meet the energy bills. Meters make budgeting easier, as customers pay for energy as they use it, but are more expensive than direct debit schemes. The result is that those on low incomes pay around 10 per cent more for gas and electricity than better-off households.

The table below provides an illustration of the poverty premium faced by an average low-income family.

Table 1 Illustrating the poverty premium

The report outlines seven steps for government and the private sector which, if implemented, would help to eradicate the poverty premium. These include the need for energy providers to align pre-payment meter rates with direct debit rates, and the government to move faster on tackling financial inclusion by increasing awareness of basic bank accounts and ensuring that they meet the needs of low-income customers.

There is a need also for the government to reform the social fund, which provides grants and interest free loans to those living on low incomes. A social fund with wider eligibility criteria, more cash available, more flexible repayment terms and less stigma in the way it functions could deliver affordable credit to those who need it most. Finally, access to free, independent financial advice is critical.

The challenge for the government and the private sector is clear. They must now rise to that challenge.