PM blocked cut in winter fuel handouts to better-off pensioners

Reducing payments would have been less controversial than 'granny tax', say Tory MPs

Plans to cut the winter fuel payments for better-off pensioners in the Budget were blocked by David Cameron, The Independent has learned.

Some Conservative MPs believe that means-testing the £2.1 billion fuel payments handed to the over-60s would have been less controversial than George Osborne's surprise decision to freeze the special tax allowances for pensioners – dubbed a "granny tax".

It is believed that the Treasury, Iain Duncan Smith, the Work and Pensions Secretary, and the Liberal Democrats were all prepared to consider curbing the winter fuel payments, which are worth £200 a year for a household with someone over 60 and £300 for one with someone aged over 80.

Options included making the payments taxable or scrapping them for pensioners who have enough income to pay tax.

However, the Prime Minister was reluctant to change the fuel allowances because he would have broken a pledge he made during the 2010 election campaign. Accusing Labour of scaremongering, he said then: "They're going around scaring pensioners, telling you that the Conservatives are going to cut the winter fuel allowance, cut pension credit and end free bus travel and TV licences for over-75s, you must not believe them. I can promise you – these are lies, lies, lies. You have my word. If we win the election, we will protect all of these things."

The Coalition Agreement said: "We will protect key benefits for older people such as the winter fuel allowance, free TV licences, free bus travel, and free eye tests and prescriptions."

But some ministers believe Mr Cameron could argue that means-testing fuel payments would not break his pledges because they would still be "protected" for the people who need them.

Winter fuel handouts are widely seen as an example of "middle-class welfare" that should not be maintained when the Government is making big spending cuts.

One Whitehall source said: "It was an obvious thing to look at and the Treasury always looks at everything in the run-up to the Budget. But the discussion did not really get past first base. It was a non-starter for Number 10."

Yesterday ministers tried to fight back after the "granny tax" dominated the post-Budget headlines.

Mr Osborne said that overall, pensioners would benefit as a result of the Government's "triple lock", which means the basic state pension increases by inflation or earnings – whichever is higher. It will rise by a record £5.30 a week next month.

The Chancellor said the age-related allowances for pensioners would have been overtaken by future increases in the personal allowance for other people and scrapping them would simplify the tax system.

In its post-Budget analysis, the Institute for Fiscal Studies (IFS) said that, in a worst case scenario, someone turning 65 in 2013-14 with an income of between £10,820 and £26,200 would lose £323 in that year – much higher than the £80 average loss cited by the Treasury.

But Paul Johnson, the IFS director, said that, in general, pensioners had not fared too badly: "Despite this morning's headlines, this looks like a relatively modest tax increase on a group hitherto well-sheltered from tax and benefit changes. From this Budget we calculate that pensioners will lose on average about one quarter of 1 per cent of their income in 2014. But the Chancellor should perhaps have given more notice of the change, giving new retirees especially more chance to adjust, and making the change once the full £10,000 personal allowance is in place. And he should have avoided dressing up what is clearly a tax increase as merely a simplification."

Case study: Worse off – despite what George says

Frank and Eileen Lucking, Chelmsford

A retired BT engineer, 63-year-old Mr Lucking said he was "very angry" to find he was one of the pensioners hit by the freeze in age-related tax allowances. He is currently not a taxpayer as his occupational pension falls below the current threshold of £7,475 for the 2011/12 tax year, and he cannot draw his state pension until he turns 65 in 2014.

When he does collect his state pension he will find himself paying more tax than he expected. His wife Eileen, 76, a retired switchboard operator for Essex County Council, will immediately feel the effect. She is currently not a taxpayer as her occupational pension and state pension are less than the tax allowance for over 75s.

"A lot of pensioners are going to find themselves becoming tax-payers after years of not paying tax," he said. "George Osborne has said that pensioners will not be worse off. That is blatantly not true. The cost of living is rising so quickly at the moment with big increases to fuel and food costs. The people I have spoken to are very, very angry that the pensioners of this country are being hit yet again.

"This is an issue that I think people will be prepared to fight about. Today's pensioners have a lot of financial responsibilities. Many have children and grandchildren who are also suffering financially and who they try to help out."