IFS: Expanding winter fuel payment eligibility – what are the government's options?

Background 

Until 2024, households with someone over the female state pension age could receive a winter fuel payment (WFP) worth £200 each year (or £300 for households with a member over age 80). All pensioners were eligible, regardless of their income or assets, and in 2023–24 11.6 million pensioners received the payment at a total cost of £2.2 billion*. Last July the government announced that WFP eligibility would be restricted to those who are in receipt of pension credit (PC) – a benefit aimed at low income pensioners. Eligibility to PC typically depends upon having an income, including the state pension and private pension income, below around £12,000 (for single pensioners) or £18,000 (for couple pensioners). As a result of this policy change, the number of WFP recipients fell by almost 90%, to 1.3 million, saving the government around £1.5 billion per year. 

At Prime Minister's Questions today the Prime Minister stated that the government is considering reforms to ensure that more pensioners are eligible for WFP. No detail beyond that was given except that the government “will look at the threshold”. 

In this comment we consider what options the government has to expand WFP eligibility. 

Possible reforms 

The broad difficulty with a policy of this nature is that the government does not in general have information on the total income of a household, except when that household applies for a means-tested benefit – such as PC. This is no doubt why the existing policy tied WFP eligibility to PC – those households getting PC are known to be low income, because they must report all their income to the government. However, the government cannot easily identify those households with incomes slightly too high to be eligible to PC. It is therefore not straightforward simply to increase the income threshold of eligibility. 

Return to universality. A simple option would be to just undo last summer's policy and return to giving WFP to all pensioners. This would cost around £1.5 billion per year, increasing eligibility by about 11 million households. 

Create a new means-tested system. The government could allow households not on PC to apply directly for WFP, reporting their income and other circumstances, enabling them to apply a means-test with a higher eligibility threshold than PC. The hassle of applying would no doubt result in many not claiming, and would imply a lot of administrative cost for what is a fairly small benefit (average WFP entitlement is £242 per year; average PC entitlement is £4,300). A closely related option would be to do the equivalent of what is currently done for child benefit: allow all pensioner households to claim WFP, but then require those who have income above a certain level to do a self-assessment tax return to pay some of it back in the form of a higher income tax charge. As with child benefit, the most administratively straightforward way to do this would be to base the repayment on the income of the higher income member of the household (rather than their total income), creating a somewhat strange means-test; and again, there would be clear downsides in the form of administrative costs and non-take-up – it is time consuming for both taxpayers and the government to fill in and assess self-assessment tax returns.  

Make PC more generous. PC could be made more generous – for example, rather than reducing PC by £1 for every £1 of income, it could be withdrawn more slowly. This would entitle more – still fairly low income – households to PC and hence WFP. The cost of this would be substantial as those already entitled to PC would become entitled to more of it. 

Make WFP an individual rather than household payment. The reason this issue is difficult is because WFP is paid to households, not individuals. Paying it to individuals would allow the government to do an individual-level means-test, based upon the individual's income that the government already records for income tax purposes. This would entail giving WFP to individuals who have a low income but whose spouse is high income. It is less clear how it would work for those whose income is sufficiently low that they do not pay any tax. It would also represent a transfer from singles to couples: currently singles and couples get the same total amount of WFP, but under this regime couples could get twice as much. 

Make those receiving other means-tested benefits also entitled to WFP. Rather than restricting WFP to only those that get PC, the government could extend eligibility to pensioners that receive housing benefit or council tax support – both of which are means-tested benefits and hence go to low income households. Tying WFP to housing benefit would extend eligibility to 430,000 renting households (owner-occupiers are ineligible for housing benefit) at a cost of around £100 million a year.2 The latter could be administratively difficult as council tax support is administered by local councils.  

Make those receiving disability benefits also entitled to WFP. Paying WFP to those pensioners not on PC who are in receipt of disability benefits would extend eligibility to 1.8 million households in England and Wales at a cost of roughly £500 million a year; it would be somewhat more complicated in Scotland where disability benefits are devolved. This would of course not specifically target low income households. 

Make those in a low council tax band also entitled to WFP. Calculations by Steve Webb shows that a little over half of pensioner households (6.3 million) live in a band A-C property. These tend to be lower income than those in higher banded properties, but, as his analysis shows, there are plenty of low income pensioners in higher bands and higher income pensioners in lower bands. 

Conclusion 

If the government wants to expand WFP eligibility – without returning to the old universal system – there are no particularly easy answers to increase eligibility substantially. Expanding eligibility to those on housing benefit (and/or disability benefits) would increase the numbers receiving winter fuel payment but still leave the vast majority of pensioners ineligible. Going further would either involve creating a new means-test, or basing eligibility on other characteristics of the household. It is fair to say that all of these are imperfect solutions – they do not expand eligibility much, or are not closely targeted towards poorer households, or impose large administrative or fiscal costs. 

In light of this, it is worth stepping back and asking what role the government wants WFP to play. One option would be not to have WFP at all. While it is labelled as being about fuel, it is ultimately just a cash payment (though some evidence suggests the labelling does increase fuel consumption). Insofar as the goal is to help people on low incomes, a more straightforward option is to increase PC; if the goal is to increase pensioners' incomes more generally, one could simply raise the state pension generosity (though this would imply redistribution from singles to couples, and the government might rather avoid that). Perhaps before it tries to tweak eligibility awkwardly, the government should consider what question WFP is the answer to. 

Tom Waters, an Associate Director at IFS and an author of the comment said: 

“There are two natural options for assessing winter fuel payment eligibility – giving it to all pensioners, or restricting it to those on a means-tested benefit. The government's reform was to go from the former to the latter, using pension credit receipt as the passport to eligibility. Middle options that significantly increase eligibility are tricky: they come with a significant price tag, or are not well targeted at low income households, or are administratively costly. There is a clear risk to adopting a clunky bureaucratic mechanism for what is, ultimately, a relatively small payment.” 

ENDS

Notes to Editor

* In a very small number of cases a pensioner could be ineligible if, for example, they were experiencing a long hospital stay.