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The British government has suffered a major financial setback after Chancellor Rachel Reeves was forced to reverse plans to cut winter fuel payments for millions of pensioners. Instead of saving £1.5 billion as originally planned, the government is now expected to save just £227 million, according to new data from the Department for Work and Pensions (DWP).
The decision marks one of the biggest U-turns since Labour came into power, showing how public pressure and internal party resistance are reshaping the government’s spending and welfare policies.
Why the plan collapsed
In June, Chancellor Reeves and Prime Minister Sir Keir Starmer announced that the winter fuel payment, which helps pensioners cover energy bills during cold months, would be cut for most retirees. The measure was designed to save £1.5 billion for the Treasury as part of wider efforts to plug a large hole in public finances.
However, Labour faced a strong rebellion from its backbench MPs, forcing Reeves to soften the policy. Instead of scrapping the payment for nearly all pensioners, the government limited eligibility to lower-income retirees. That change alone cut expected savings from £1.5 billion to £450 million.
Now, fresh figures show that a surge in pension credit claims has slashed those savings even further. Between July 2024 and July 2025, about 181,100 pensioners successfully claimed pension credit – an increase of 57,200 compared with the previous year.
Because those who receive pension credit automatically qualify for the winter fuel allowance, the government must now pay an extra £223 million in benefits every year. This reduces the net saving from £450 million to only £227 million – just one sixth of the original £1.5 billion target.
Experts and critics react
Pension policy expert Sir Steve Webb of consultancy LCP described the policy as “ill-fated” and said the Chancellor must regret ever introducing it.
“It is entirely welcome that more pensioners who are entitled to pension credit are now claiming what they are entitled to. But this surge in claims has put a further dent in the revenue from this policy,” Webb said.
Critics argue that the government underestimated both the political risks and the social impact of targeting a benefit that directly supports elderly people during the cost-of-living crisis. Many pensioners in the UK are already struggling with high energy bills, food inflation, and rising health costs.
Wider fiscal challenges for Reeves
The setback comes as Reeves prepares her first autumn budget under growing pressure. Analysts warn that Labour’s repeated policy reversals, combined with higher government borrowing costs, could leave a £50 billion shortfall in public finances.
Already, a watering down of welfare reforms is estimated to have cut expected savings by around £3 billion. Observers believe Reeves may be forced to raise taxes again this autumn in order to meet her fiscal rules and keep debt under control.
This would put Labour in a politically difficult position, as many voters had expected the new government to ease the cost-of-living burden rather than increase taxes.
Government’s defence
A DWP spokesperson defended the decision, saying it was necessary to focus support on those who need it most.
“By having an income threshold of £35,000, we’re ensuring that pensioners who need support the most receive it, whilst also making significant savings,” the spokesperson said.
The government also highlighted its “biggest ever Pension Credit awareness campaign,” which has helped more low-income households access extra support. On average, those who qualify for pension credit now receive £82 per week, which officials described as a “lifeline.”
Even so, the dramatic fall in savings from £1.5 billion to £227 million shows how the combination of political resistance and rising welfare claims has reshaped Labour’s financial plans.
For Reeves, the challenge will be how to balance the government’s books without hurting vulnerable groups or triggering another political backlash.
