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The UK government’s attempt to save £1.5bn by cutting winter fuel payments to pensioners could end up costing money after a series of offsets and U-turns, analysts have warned.
Prime Minister Sir Keir Starmer last week bowed to pressure from Labour MPs to preserve the payments for most pensioners, in a move that experts say would reduce the planned savings to about £180mn.
At the same time, there has been about £230mn of new claims for pension credit after the government initially encouraged applications to offset the impact of the cuts.
“We could end up in a position where the new system actually costs the government more money overall and has done considerable political damage,” said Steve Webb, a partner at pension consultancy LCP, who first identified the potential losses.
Jon Greer, head of retirement policy at wealth manager Quilter, agreed with the calculations and said that through “poor decision making and a hastily announced U-turn with no plan in place” the government, “may find itself adding” to welfare costs.
The winter fuel payments are the latest example of the government having difficulty implementing measures that reduce the deficit. Tax increases on non-domiciled residents are being offset by wealthy foreigners leaving the UK.
Starmer reversed course last week on the cut to fuel payments for 10mn people, one of the first policies Labour put in place after winning power last year, telling MPs he wanted “more pensioners” to be eligible for the subsidy.
His move followed widespread discontent among backbench MPs and local election losses this month where the policy was one of the top issues raised by voters on the doorstep.
In 2023/24, the government spent £2bn on winter fuel payments to 11.63mn individual pensioners, with an average payment of £175 per person, according to government data.
But if Labour obliges higher-rate taxpayers to refund the payment, which officials say avoids the cost and complexity of means-testing, only a small fraction of the beneficiaries will be affected.
At present, just over 1mn pensioners pay income tax above the basic rate — 904,000 at the 40 per cent rate and 124,000 at the 45 per cent rate — according to data provided by the department for work and pensions via a freedom of information request.
This suggests that the government would recoup only around £180mn by clawing back payments from the 1mn higher-income pensioners via their tax returns.
This figure compares with the £230mn in additional pension credit payouts that official statistics indicate the government has made since Labour announced its cuts to the fuel allowance in July last year.
Amid warnings that the restrictions could plunge some pensioners into poverty, the DWP announced a Pension Credit Week of Action, urging those eligible to apply for a benefit worth on average £3,900 per year.
Between July 2024 and May 2025, there were 58,800 extra awards of pension credit compared with the same period last year, according to government data released on Thursday.
A government spokesperson said: “We inherited public finances that were in a disastrous state and had to take swift action to stabilise the economy.
“Our number one mission remains putting more money into people’s pockets through our Plan for Change — and we know that many people are still struggling with the cost of living, including pensioners . . . That’s why we would like to expand the number of pensioners who are eligible for Winter Fuel Payment when possible.”
