How to boost your chances of getting the Winter Fuel Payment

Pensioners with an income of less than £35,000 will receive the Winter Fuel Payment this year – but a fifth of retirees are set to miss out.

The government changed the eligibility rules last week, meaning more people will get the payment this winter. The U-turn follows the government means-testing the Winter Fuel Payment last year, mainly restricting it to those receiving Pension Credit.

According to the Treasury, nine million pensioners in England and Wales will now receive the benefit this winter. This leaves about two million people over state pension age who have taxable incomes of more than £35,000 and won’t be eligible.

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If your income is over £35,000, the Winter Fuel Payment will be paid to you and reclaimed later via HMRC. Further details on this are expected later this month.

The payment is worth £200 per household, or £300 per household where there is someone aged over 80.

However, if you’re worried you won’t qualify for the payment because you get more than £35,000 of income a year, you might wonder if there are any ways to keep your Winter Fuel Payment.

There are some tips and tricks which could boost your chances of being eligible. Some don’t even involve reducing your actual income; instead, it’s about smart financial planning.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, tells MoneyWeek: “The government only looks at your taxable income so there are some simple things you can do to reduce this, which means you can qualify for the Winter Fuel Allowance as well as save tax.”

1. Move your savings and investments into ISAs

The £35,000 threshold will be based on an individual’s taxable income, rather than their total income.

This means one of the first things you should do is ensure you’re making the most of ISAs. Any interest you make from cash ISAs or income from stocks and shares ISAs does not count towards your taxable income.

In contrast, interest earned on non-ISA savings accounts, or taxable income from investments, will be included.

Jeremy Cox, head of strategy at Coventry Building Society, comments: “Many pensioners may not realise that interest earned on savings held outside of ISAs count towards their total taxable income. With interest rates still relatively high, even modest savings can generate income that pushes someone over the threshold.”

For example, £20,000 in a savings account earning 4.5% would make £900 in interest for the year. While this falls within the personal savings allowance of £1,000 for basic-rate taxpayers and isn’t taxed, it’s still considered as “taxable income” and counts toward the £35,000 Winter Fuel Payment limit, according to Cox.

He adds: “ISAs offer a tax-free way to keep savings interest out of the income equation. Interest earned within an ISA is never taxed and does not count toward income calculations.

“With the £20,000 cash ISA allowance still available this tax year – and potential changes looming – they remain a smart choice for pensioners looking to protect their eligibility for benefits like the Winter Fuel Payment.”

Note that as well as any ISA income or gains being tax-free, you also won’t pay tax on withdrawals from an ISA, even if you cash in the full amount – so, you could cash in an ISA to supplement your retirement income, but it still won’t count towards the Winter Fuel Payment criteria.

2. Consider Premium Bonds if you’ve maxed out your ISA allowance

If you’ve already used this year’s ISA allowance, and you have significant savings where the interest could cause you to breach the £35,000 taxable income limit, consider buying Premium Bonds.

Any Premium Bond prizes you may win are tax-free, so therefore aren’t part of your taxable income.

3. Take your pension tax-free cash – but beware of taking more

As well as ensuring you can enjoy the gains from your savings and investments without counting towards your taxable income, you should also have a look at your pensions.

Taking the 25% tax-free cash from any workplace or personal pensions can give your retirement income a decent boost, and crucially it’s not taxable income.

However, any other money from pensions, such as via an annuity, income drawdown or a lump sum is taxable.

Morrissey suggests keeping an eye on your pension income and potentially combining pension and ISA income to keep you below the threshold. For example, if you had previously been taking £30,000 from your pensions each year, and also receive £10,000 from the state pension, that works out as £40,000 taxable income.

However, if you reduced the £30,000 to £25,000 income from your pension, and topped up your income with £5,000 withdrawals from your ISA, then you would still have the same £40,000 total income – but only £35,000 would be taxable.

Note that the criteria states you can receive the Winter Fuel Payment if your taxable income is at or below £35,000 a year. So, if it’s exactly £35,000, you will still qualify.

Also note that if you are receiving an annuity, it isn’t possible to reduce this income, as it’s a guaranteed pension income for life.

If you are taking lump sums from your pension pot(s), or have set up an income drawdown arrangement, you can reduce the amounts to avoid tipping over the £35,000 threshold.

4. Think about deferring your state pension

If you’ve followed the above steps, and you’ve worked out that claiming the state pension will take your total taxable income above £35,000 and mean you don’t qualify for the Winter Fuel Payment, you could consider deferring your state pension.

You don’t need to do anything to defer it; you just don’t claim it once you reach state pension age.

Morrissey comments: “Deferring your state pension is an option. However, it’s worth saying that deferring it means you will get a larger state pension when you do come to claim it and this has the potential to push you up into higher tax bands or mean you no longer qualify for benefits you would have otherwise received.

“You also have to weigh up whether it’s worth losing out on a year’s worth of state pension now in order to claim the winter fuel allowance plus a higher state pension later.”

Sarah Pennells, consumer finance specialist at Royal London, adds: “It’s important not to make any knee-jerk decisions. Delaying claiming your state pension increases your payments by 5.8% for each year you defer.

“However, you will be giving up approximately £12,000 of income a year at current rates, assuming you are entitled to the full new state pension, so it will take some time to recoup that.”

5. Transfer income-generating assets to a spouse with less income

Another way to reduce your taxable income is to move assets to a spouse or partner whose income is below the £35,000 threshold.

For a couple where one person has an income above £35,000 and one has an income of less than this amount, they will both get the Winter Fuel Payment (which is £100 each, or £150 if one person is over 80), but the higher earner will have to pay theirs back.

So, if one of you has taxable income of £40,000 and the other has £20,000, by shifting £5,000 of income to the lower income partner, you can still enjoy £60,000 total household income together – and both keep the Winter Fuel Payment.

6. Don’t worry about certain benefits adding to your income

Many benefits are not taxable, so you can enjoy receiving them without worrying they’ll contribute to the £35,000 limit.

Pennells points out that Attendance Allowance, which is not means-tested and is paid to people over state pension age to help with extra costs if they are ill or disabled, is not taxable. Neither is Pension Credit and the Winter Fuel Payment itself.

However, some are, such as Carer’s Allowance (or the Carer’s Support Payment in Scotland). So, remember to include the taxable ones when calculating if you’re at risk of losing the Winter Fuel Payment.

7. Give excess money to charity

One way of reducing your taxable income that is often overlooked is making donations to charity, Pennells said.

She explains: “If you donate through Gift Aid, this means you can deduct the value of the donation, plus the basic rate of tax, which is currently 20%, from your taxable income.”

If you’d been considering giving to charity through your will, making some of these donations now will help the charity faster, lower your taxable income and could mean you keep the Winter Fuel Payment.