Can the Winter Fuel Payment be forfeited if a pension is withdrawn to purchase a faulty vehicle?
For individuals with a taxable income exceeding £35,000, the Winter Fuel Payment (WFP) may no longer be a straightforward benefit. HMRC will reclaim the payment through the tax system for the 2025/26 winter season, potentially wiping out the value of their share of the WFP. However, there are strategies to retain the WFP without taking out a loan or dipping into pensions.
To retain the WFP without additional borrowing or pension access, individuals can manage their income streams strategically to stay below the £35,000 threshold.
Key Options:
- Utilizing tax-free savings vehicles: Cash Individual Savings Accounts (ISAs) can be a useful tool, as interest earned there is not taxable and thus does not count towards the £35,000 taxable income limit.
- Adjusting income sources: Reducing taxable income can be achieved by limiting withdrawals from taxable private pensions and using non-taxable income where possible.
- Financial planning: Consulting a financial advisor may help create tailored income management strategies, including reviewing the timing and structure of income to reduce taxable income in a given tax year without affecting total funds available.
HMRC automatically recovers the payment either via PAYE or a self-assessment tax return for those above the limit, making proactive income management necessary to retain eligibility without borrowing or dipping into pensions.
It is essential to note that opting out of the WFP system might not be beneficial in the individual's situation, as their income is only temporarily over the limit for one year. Each individual, under 80 and not receiving benefits, typically receives an equal share of the total £200 WFP. Only the individual's share (typically £100) is at risk if their income goes above £35,000, not the total household payment.
Individuals have until 15 September to opt out of the WFP system if they wish to do so. It is also important to remember that what affects the WFP is the individual's income, not the combined income of the individual and their spouse or partner.
For those considering pension options, several investment platforms for Self-Invested Personal Pensions (SIPPs) are available, including AJ Bell, Hargreaves Lansdown, Interactive Investor, InvestEngine, and Prosper. Affiliate links are present in the article, and This is Money may earn a commission if a product is taken out.
If an individual needs to withdraw a lump sum from their pension pot to replace a 'clapped out' car, the withdrawal could take their annual income over the HMRC limit of £35,000. However, depending on the state of the car, another option is to hold on until the end of the tax year and take the withdrawal in two lumps, one before 6 April 2026 and one afterwards, provided each individual lump keeps the individual within the limit.
Alternatively, an individual can take a smaller pension withdrawal to 'mop up' any spare income between their current annual figure and the £35,000 limit, without affecting their WFP entitlement. If a partner has access to a pension pot or other savings and can do so without taking their income above the £35,000 limit, the car could be purchased without affecting the payment.
In conclusion, managing income composition is the key route for individuals wishing to keep the WFP without additional borrowing or pension access. By utilizing tax-free savings, adjusting income sources, and seeking financial planning advice, individuals can maintain their eligibility for the WFP.
- To ensure retention of the Winter Fuel Payment without exceeding the £35,000 income limit, individuals might choose to invest in tax-free Individual Savings Accounts (ISAs), which can generate non-taxable interest.
- Besides ISAs, maximizing the use of non-taxable income sources, such as avoiding withdrawals from taxable private pensions, can help in keeping the taxable income below the threshold.
- Engaging in financial planning, which may involve seeking advice from a financial advisor, can provide personalized strategies to manage income and reduce taxable income during specific tax years, without impacting the overall funds availability.
