Welfare: Disabled and sick pay the price to save winter fuel allowance

One million sick and disabled people struggling to find jobs are to lose thousands of pounds in benefits a year and be forced into work as part of a £7bn raid on welfare payments.

George Osborne dodged bad headlines by avoiding cuts to high-profile schemes such as the winter fuel allowance and cold weather payments to the elderly. He also preserved free TV licences and bus passes for pensioners and avoided a further cut to child benefit.

But safeguarding the payments came at a heavy price for the millions on out-of-work and means-tested benefits, many of whom will see their incomes fall as a result of the savings made to the £193bn welfare budget. Some analysts said more than 10m people could be affected.

The main losers are those receiving the Employment and Support Allowance, a payment of up to £97 a week for those unable to work because of ill health or disability. Under the changes, claimants will receive the benefit for only 12 months. This will supposedly save £2bn by 2014.

After a year, some of those still claiming will either be forced to find work or given the Job Seekers' Allowance instead, meaning they could be around £30 a week worse off. Others will be given a slice of the old benefit on a means-tested basis.

It represents a radical shake-up of Britain's welfare system, aimed at tackling "welfare dependency" and forcing more people into work. However, critics said the cuts were too deep and questioned whether the jobs market would be able to provide enough for those pushed off benefits.

The latest reforms, tot-alling an extra £7bn by 2014, come on top of the £11bn chopped from Iain Duncan Smith's department in June's emergency Budget through cuts to the disability living allowance, housing benefit, child benefit and a £3.2bn tax credit squeeze.

Family Action, a campaign group for low income households, calculated that a raft of changes announced by Mr Osborne would see many families on low incomes lose out. Poor pensioners were also hit by changes to pension credits, which will save the Treasury £330m by 2014.

Housing benefit was also altered, saving £215m by 2014. The changes mean that from 2012, single people under 35 will be paid a shared room rate instead of a higher rate for a full flat. The reform was attacked by the homeless charity Shelter.

Analysts argued that Mr Osborne had avoided cuts to middle-class benefits by beginning a major shift in who is handed work-related benefits.

"At first glance the headline messages seem reassuring," said Alan Downey, head of the auditor Public Sector KPMG. "There will be no further withdrawal of universal benefits from those on middle and high incomes. The elderly will continue to receive the fuel allowance as well as free eye tests, free prescriptions, free TV licences and free bus passes.

"However, the fine print reveals that the Chancellor is aiming to save money by curtailing entitlement to benefits, rather than the rate at which benefits are paid. A significant number of people will lose their eligibility for housing benefit, council tax benefit and out-of-work benefits."

Alison Garnham, chief executive of Child Poverty Action Group, said the changes were "worryingly short-sighted and profoundly unfair".

She said: "The Employment and Support Allowance change is especially worrying. People who have paid National Insurance contributions are now being told that if they cannot work due to illness or an accident they may lose benefit after a year."

Millions of Government workers were also told they would have to wait longer before receiving a state pension. Both men and women will have to wait until they are 66 to begin receiving the pension by 2020, the Chan-cellor said. It will save £5bn a year.

Osborne's sleight of hand

With a little statistical sleight of hand, George Osborne has saved himself billions of pounds in welfare payments.

From April, benefits, tax credits and public-sector pensions will rise by a measure of inflation known as the Consumer Price Index (CPI), rather than the traditional Retail Price Index (RPI) measure.

RPI includes such costs as mortgage interest payments and council tax in its measure of inflation, while CPI does not. CPI also measures the effects of inflation across the whole population, while RPI misses out key groups such as pensioners.

But most germane for a cash-strapped Mr Osborne is that CPI inflation is rising at 3.1 per cent a year while RPI is running at 4.6 per cent.

This means huge savings for Mr Osborne – up to £6bn over four years – but less money for pensioners and those on benefits.

Oliver Wright

Case study: 'I am trapped if I have no incapacity or disability benefit'

Helen Searle, a 36-year-old from Beaconsfield, has cerebral palsy and claims Incapacity Benefit and Disability Living Allowance. She suffers from pain in her legs, hips and back and is often in a wheelchair. She is keen to work but is not always physically able to – and is anxious about the possibility that her benefits will now be cut unless she returns to work.

"I used to work but found it so demanding that I had to choose between a working life and anything resembling a social one," she said yesterday. "I would work one week, then spend the next in bed, unable to move.

"At the moment, my condition is taken into account when I am looking for jobs. I want to get back to work, but shoving me on to Jobseeker's Allowance only makes that less likely because I would no longer receive the kind of support I need.

"I have been on Jobseeker's Allowance before and they don't take it into account; when I am sent for interviews, I often find that there is no wheelchair access, so I could not get into the building. How ridiculous is that for a reason to miss out on a job?

"If I am reassessed as having to move back on to Jobseeker's Allowance, I will be trapped again."