Should better-off pensioners sacrifice their winter fuel allowance?

Published by on 28 February 2013.
Last updated on 30 September 2013

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By Professor Stephen Lee, chief executive of CentreForum, the liberal think tank

The government has set out its ambition to deliver the Dilnot Commission's proposals on reform of social care funding in the next parliament.

If and when this happens, people's lifetime contributions towards their care costs would be capped at £75,000, after which the state would pay. In addition, the means-test threshold for individuals in residential care would rise from £23,250 to £123,000.

Although these proposals have a significant price tag attached to them - around £1 billion a year - the case for delivering them is very strong.

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At present, many people who have saved hard for retirement risk losing the bulk of their assets when paying for care. A lifetime cap on care costs, coupled with a higher threshold for meanstesting, would achieve a more balanced outcome.

It would give individuals the reassurance that they won't lose everything to unforeseeable illness. And it would give greater certainty to the insurance market, which is eager – but not always able - to provide the products people need to plan and save carefully.

The government has indicated that its social care proposals could be funded by freezing inheritance tax thresholds, rather than increasing them in line with inflation, and from money saved through the introduction of the flat-rate state pension. But with four years to go before the changes are expected to come in, how the proposals are funded should be very much up for debate.

In a recent report for CentreForum, former care minister Paul Burstow argued that they could be paid for in part by means-testing pensioners' winter fuel payment, which provides up to £300 tax-free for anyone born before 5 July 1951.

While the very poorest pensioners would not be affected by the change, those with an income above the eligibility threshold for Pension Credit would be required to forgo their winter fuel payment.

This would be a sacrifice worth making.

The universal provision of the winter fuel payment is hard to justify when only 12% of winter fuel payments go to those in fuel poverty. Pensioners have had a relatively painless recession and should be asked to bear some of the impact of fiscal consolidation.

According to the Institute for Fiscal Studies, over-65s have seen a marginal rise in their household income since 2008. By contrast, under-35s have seen their household income fall by around 8%.

As well as being the only group in society to see recent growth in average household income, the pensioner population has been allowed to keep tax breaks and benefits not generally available to people of working age.

This includes exemption from national insurance, lump sum pension relief exceeding £300,000, and a triple-lock state pension that guarantees a pension increase of at least 2.5% every year. It also includes universal pensioner benefits such as free bus passes and TV licences, the Christmas bonus and, of course, the winter fuel payment.

We need a resolution on social care funding. It is entirely reasonable to ask pensioners - the only group whose welfare is being ring-fenced, and whose need for care is most immediate - to pick up part of the bill.


By Dr Ros Altmann, pensions and economics policy expert

There have been continued calls for the government to limit pensioners' winter fuel payments and only pay it to those claiming Pension Credit in order to save money. This may sound appealing, but the reality is it would be a short-sighted saving that could have damaging longer-term consequences.

It could, in fact, intensify the care crisis as more people become dependent on the state.

Taking away winter fuel payments from millions of pensioners would be unfair to those who saved to provide for themselves in retirement.

It would mean any pensioner living on around £14,000 a year would lose this money. How can people with incomes of that level be considered well-off?

Average pensioner incomes are well below £20,000 a year. Of course, there are some high-income pensioners, but that is not the majority. In fact, only 2% of pensioners pay 40% tax.

The winter fuel payment was introduced because past politicians had to make up for our inadequate basic state pension. But rather than adding a few pounds a week to the state pension itself, politicians grabbed better headlines by inventing a new benefit for all pensioners.

So taking this payment away because some pensioners don't need it would amount to a state pension cut for all those who saved to avoid living on the state.

There are much better options for saving money that would avoid the dangers of extending means-testing. For example, taxing pensioner benefits, increasing the age of entitlement, or providing a mechanism to pay the money back. All of these will still keep the principle of universality, which is vital to ensure the money gets to all pensioners and that saving for retirement is considered worthwhile.

The best solution, however, would be to use the radical overhaul of the state pension itself to provide a decent minimum income, without needing to add extra benefits.

The £144 a week flat-rate state pension could help address the problem of add-on pensioner benefits. Once a minimum flat-rate payment is established, these extra payments could be rolled into one state pension and taxed accordingly.

Anyone concerned about the collapse in our savings culture should encourage the introduction of more incentives for saving and self-reliance – not taking away existing benefits and imposing more means-testing.

There is also the worry that as energy bills reach record highs, taking away winter fuel payments from pensioners with modest incomes would plunge more of them into fuel poverty.

Every winter, more than 20,000 pensioners die of cold in this country and many more suffer cold-related illnesses. These excess winter deaths and illnesses would increase if more pensioners were denied this allowance. This could increase care costs in the long run.

Overall, it is important to reduce means-testing, not extend it further and if we do want long-term saving to thrive, we will need to ensure pensioners are not penalised for having saved.

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