How savings can affect you claiming Universal Credit and other benefits

Building an emergency fund is one of the most common pieces of financial advice.

But if you receive means-tested benefits, it’s important to understand how having savings can affect your entitlement.

“People on benefits are often told to build an emergency fund, but not enough attention is paid to cutting through concerns around how savings impact the support they rely on and what the rules are around it, leaving space for misunderstanding and worry,” says Vix Leyton, consumer finance expert at Think Money.

“With this in mind, it is completely understandable that people become nervous about putting money aside at all.”

Here’s what you need to know.

What are means-tested benefits?

Means-tested benefits, such as Universal Credit, Pension Credit and Housing Benefit, are based on your financial circumstances.

As well as your income, how much capital you have (in other words, savings, investments and other assets) will be used to determine whether you qualify and how much you will receive.

Other benefits, such as the State Pension, Attendance Allowance and Personal Independence Payment, are not means-tested. With these benefits, your savings and assets won’t affect your entitlement.

Will I lose my Universal Credit if I have savings?

According to the Government, about 8.4m people in the UK are on Universal Credit and about 1.6m are receiving Housing Benefit (although most working-age claimants have now moved to Universal Credit).

With either of these benefits, if you have less than £6,000 in capital, your payments will be unaffected.

If you have between £6,000 and £16,000 in capital, your Universal Credit payment (known as your award) will be reduced.

This is because the Department for Work and Pensions (DWP) assumes your savings generate income. For every £250 (or part of £250) you have above the £6,000 threshold, your monthly award will be reduced by £4.35.

If your capital exceeds £16,000, you usually won’t qualify for Universal Credit or Housing Benefit.

What about Pension Credit?

Around 1.4m people in the UK receive Pension Credit, a means-tested benefit that tops up the income of pensioners on low incomes.

If you have £10,000 or less in savings and capital, it won’t affect your Pension Credit entitlement. But every £500 over £10,000 counts as £1 income a week.

For example, someone with £15,000 in savings would have £10 a week added to their assumed income calculation, reducing the amount of Pension Credit they receive.

What counts as capital?

When it comes to calculating benefits payments, capital includes cash savings, investments, cryptocurrency, assets, and property other than your main residence.

However, your home, car and most personal possessions are usually ignored. Money set aside for a self-assessment tax bill, and some compensation or insurance payouts, may also be disregarded temporarily.

However, an inheritance usually counts as capital, and could reduce or end your Universal Credit entitlement.

Sarah Coles, head of personal finance at AJ Bell, says: “If you’re under state pension age, and haven’t started drawing from your pension, then your pension pot isn’t included. However, if you are 55 or over and have started drawing from it, or if you’re over state pension age (currently 66) – even if you’re not taking money from your pension – it will be factored in.”

Why does my partner’s money matter?

If you live with your partner, their income and savings will usually be included when assessing your entitlement to means-tested benefits.

This is because the DWP treats cohabiting couples as one household.

Coles says: “If you and a partner move in together, it’s your combined savings and investments that matter. This is the case even when you keep your money entirely separate, and even when you have only just made the move.

“This can feel unfair to anyone who may be no better off personally after the move, if they lose their benefits anyway.”

Why should I still save up an emergency fund?

Although having more savings can reduce your entitlement to Universal Credit and Pension Credit, building an emergency fund still has important advantages.

It can help you cope with unexpected expenses, reduce your reliance on credit and give you greater financial security.

If your financial circumstances change, it’s important to tell the DWP. If your savings increase or you move in with a partner and don’t report it, you could be overpaid benefits and later asked to repay the money. Keeping records of your savings and any lump-sum payments can also help if your claim is queried.

Bear in mind that money held in a personal or workplace pension doesn’t count towards the Universal Credit savings limit. This means increasing your pension contributions could reduce the amount of capital taken into account for your claim – while boosting your retirement fund.

You could also pay essential bills, such as council tax or home insurance, upfront rather than monthly. However, any decisions should be reasonable, as the DWP may investigate if it believes you’ve deliberately reduced your savings to claim more benefits – this is known as deprivation of capital.

Leyton says: “The important distinction is between sensible financial housekeeping and trying to make your finances look different from what they really are. The safest approach is to keep it transparent, keep records, understand what counts as capital for the benefit you are on, and report changes promptly so you do not end up with an overpayment hanging over you.”

When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.