Understanding Pensions & Care Fees

How Pensions Are Treated in Means Tests

When a local council assesses your ability to pay for care, they look at both your capital (savings, property) and your income (pensions, benefits).

Pensions as Income

Any income you receive from your pensions is counted in the means test. This includes:

• State Pension
• Workplace pension payments
• Private pension annuity income
• Income drawn down from a flexible pension pot

The council will assume you are receiving all income you are entitled to.

Pensions as Capital

A crucial point is that a pension pot that you have not yet started to draw from (i.e., it is 'un-crystallised') is NOT included as capital in the financial assessment. This means the value of your untouched pension fund is protected from being used for care home fees.

However, once you start taking money from your pension, any lump sums you take (beyond the 25% tax-free amount) that are not spent will be treated as capital if they are in your bank account.

The State Pension

Your State Pension is counted as income in the care funding assessment. After assessing your income, the council will leave you with a weekly Personal Expenses Allowance (PEA).

The PEA in England is currently £28.25 per week (2023/24). This is the amount of your own money you are allowed to keep for personal spending. The rest of your income, including your State Pension, will go towards your care home fees.

Private and Workplace Pensions

These pensions offer more flexibility, which can be helpful when planning for care costs.

Defined Contribution Pensions

With these 'pension pots', you have several options when you retire:

• Take a 25% tax-free lump sum: You can take a quarter of your pot tax-free. This can be used for various purposes, but if held as cash, it will be counted as capital in a means test.
• Buy an annuity: Use your pot to buy a guaranteed income for life. This income will be part of the means test.
• Use income drawdown (Flexi-Access Drawdown): Leave your pot invested and draw an income from it as needed. This provides flexibility, but the income you take is assessable.

Using Your Pension to Pay for Care

If you are self-funding, you can use your pension income and lump sums to pay for care directly. Careful planning is needed to ensure the funds last as long as they are needed and to manage your tax liability.

Pension Credit and Other Benefits

Pension Credit is a means-tested benefit to top up your income if you are over State Pension age. It has two parts:

• Guarantee Credit: Tops up your weekly income to a minimum level.
• Savings Credit: An extra payment for people who have saved some money towards their retirement.

If you are moving into a care home, your eligibility for Pension Credit and other benefits like Attendance Allowance may change. It is vital to get a full benefits check.

Specialist Pension Advice

The decisions you make about your pension can have long-lasting consequences for you and your family. It is highly recommended to seek independent financial advice from a regulated adviser who specialises in later-life and care funding planning.