Gordon Brown introduced the Winter Fuel Allowance to solve the problem of seasonal heating costs. He was heavily influenced by the winter of 1996-7. In those winter months there were 49,000 excess deaths. The allowance cost £2 billion in 2019 but is it fit for purpose?
Brown set the allowance at £200 for eligible households. It’s been unchanged for 23 years. Brown left office in 2010, so let’s examine the period 1997-2010 when he was either Chancellor or Prime Minister.
There was 42% inflation in those 13 years.* To maintain the purchasing power of the allowance it should have increased to £284 in 2010. Conservative chancellors didn’t increase the allowance either. It should have risen to £366 in 2020 to rectify 23 years of inflation. Why has it remained unaltered?
Accountants love ring fenced finance but it bemuses pensioners. Brown assumed the Winter Fuel Allowance would be spent on seasonal heating bills. He’s got a PhD in economics and that’s exactly the way he thinks. Meanwhile on Planet Earth pensioners saw it as a welcome bonus. The £200 arrives immediately prior to Christmas, which is exactly not the time when they’re budgeting. So it’s usually spent on presents and food.
The rate of inflation gives the direction of travel for the prices of goods and services. It’s a generalised statement. Some commodities out-perform inflation, whilst others fall in price. Energy prices are notorious for varying quite a bit. However domestic energy bills have more-or-less risen at the rate of inflation over the 23 years. The purchasing power of Winter Fuel Allowance has reduced by 50%+ (see Addendum). This contrasts with the state pension, which has increased from £62.45 p.w. in 1997, to £134.25 in 2020. This is a significant increase in purchasing power.
By adding in ‘extras’ like the Winter Fuel Allowance, the purchasing power of the pension is opaque. Britain has other oddities*** such as the £10 Christmas bonus. It isn’t indexed against inflation, “When it was launched in 1972 it was worth more than the weekly state pension. Had it risen in line with inflation, it would today be worth around £134.”**** As a result, “an average UK pensioner’s income is worth 29% of their earnings at retirement, compared to 51% in Germany, 75% in France and 82% in Spain.”*****
The Winter Fuel Allowance is part of the murky world of Britain’s state pension. Because of unindexed benefits and a state pension which is a political football, British pensioners are poorer than they should be. There should be a consolidation of all of these historic accretions. Deleting all ring fenced benefits is the only way to get clarity on the purchasing power of the state pension.
Addendum: the reducing purchasing power of the Winter Fuel Allowance
In 1997 the Winter Fuel Allowance added 6% to the state pension lifting it from £3247 p.a. to £3447. In 2020 it added 2.86%.
* Inflation calculator | Bank of England
** London property prices have risen in last 20 years by 400% – PropGoLuxury – Property News
*** Christmas Bonus Payment Date 2020 | DWP XB Holiday Bonus (theukrules.co.uk)
**** What is the point of the pensioners’ £10 Xmas bonus when it won’t even cover the cost of a turkey? | This is Money
***** This comparison of pensions in different countries is misleading – Full Fact
For the excess deaths of 1996-7 see Mortality during the 1996/7 winter – PubMed (nih.gov)
For the cost of the allowance see DEBATE: Last year’s winter fuel allowance for pensioners cost almost £2bn – should the benefit be means-tested? – CityAM : CityAM
For eligibility for the allowance see Winter fuel allowance/payment | Age UK
For the annual increase in state pension see Basic state pension rates – Royal London for advisers
For the political nature of Britain’s state pension see A Tale of Two Benefits: Britain 2010-20 | Odeboyz’s Blog (oedeboyz.com)