Pension Drawdown and Care Home Fees: What You Need to Know

How Pension Drawdown Income Affects Care Home Costs

As people live longer, the question of how to fund later-life care is becoming increasingly important. For those in pension drawdown, understanding how their pension income interacts with care home fees and local authority means testing is essential for effective retirement planning.

This guide explains the key rules around pension drawdown and care costs in the UK, including how local authorities assess pension wealth when determining who pays for care.

The Cost of Care in the UK

Care home fees in the UK vary significantly by region and the level of care required. As a general guide:

• Residential care: The average cost is around £800–£1,200 per week in England, though this can be considerably higher in London and the South East
• Nursing care: Where nursing is needed on top of residential care, costs typically range from £1,000–£1,500 per week or more
• Domiciliary care: Home-based care may cost £15–£30 per hour, depending on the provider and location

With care potentially costing £50,000–£80,000 or more per year, it's easy to see why many people worry about how they'll fund it.

How Means Testing Works

When someone approaches their local authority for help with care costs, a financial assessment (means test) is carried out. This determines whether the individual must pay for their own care, receives partial funding, or qualifies for fully funded care.

The Capital Thresholds (England)

As of 2025/26, the thresholds in England are:

• Above £23,250: You are expected to fund your own care entirely (self-funder)
• Between £14,250 and £23,250: You may receive some local authority support, but are expected to contribute from your capital. This is calculated using the "tariff income" rule — for every £250 of capital above £14,250, £1 per week is assumed as income
• Below £14,250: Your capital is disregarded, but you may still need to contribute from your income

Note: These thresholds are expected to change when the government implements the care costs cap reforms, which have been delayed multiple times. Many people choose to plan based on current rules while keeping an eye on potential changes.

Scotland and Wales

Scotland and Wales have different rules. Scotland offers free personal care for those assessed as needing it (regardless of age since 2019), though accommodation costs must still be met. Wales has its own capital thresholds, which differ from England.

How Is Pension Drawdown Treated?

This is where things get particularly important for anyone in flexi-access drawdown. The treatment depends on whether you have accessed your pension or not.

Unaccessed Pension Funds

If you have a pension pot that remains completely unaccessed — meaning you have never taken any income or lump sum from it — it is generally not counted as capital in the means test. This is because the local authority considers it inaccessible until you choose to draw from it.

However, this is not a simple loophole. Local authorities have the power to assess whether someone has deliberately deprived themselves of assets to avoid paying care fees.

Accessed Pension Funds (Drawdown)

Once you have designated funds into drawdown (even if you've only taken the tax-free cash), the situation changes. The local authority may treat your drawdown fund differently:

• Income withdrawals: Any income you take from drawdown is assessed as income in the means test
• The remaining fund: Some local authorities may treat the accessible drawdown fund as notional capital — meaning they consider it as capital you could access, even if you haven't withdrawn it yet
• Notional income: In some cases, local authorities may apply a notional income to your drawdown fund, assuming you could be taking a reasonable level of income from it

The key point is that once a pension fund has been accessed for drawdown, it loses much of the protection it had as an unaccessed pot.

Deliberate Deprivation of Assets

Local authorities can investigate whether someone has deliberately arranged their finances to reduce their assessable wealth and qualify for care funding. This is known as deliberate deprivation of assets.

Examples that might raise questions include:

• Gifting large sums of money to family members shortly before entering care
• Spending down capital on extravagant or unusual purchases
• Deliberately leaving a pension unaccessed to keep it outside the means test (if the authority believes you did so to avoid paying for care)

If a local authority determines deliberate deprivation has occurred, they can treat the individual as still possessing the assets for means-testing purposes. There is no specific time limit on how far back they can look.

The Pension Drawdown Dilemma

This creates a genuine planning challenge. On one hand:

• Accessing drawdown early provides retirement income but may expose your entire pension fund to means testing if you later need care
• Leaving pensions unaccessed keeps them outside the means test but limits your retirement income and could be challenged as deliberate deprivation

Many financial commentators suggest that the best approach involves legitimate, well-documented financial planning carried out well in advance of any care needs — not last-minute restructuring designed to avoid fees.

Practical Considerations

1. Take Only What You Need

One approach many people consider is withdrawing only what they need from drawdown each year, rather than taking large lump sums. This manages tax efficiency while potentially limiting the amount assessed as income for care purposes.

2. Consider the Timing of Access

The distinction between accessed and unaccessed pensions is significant. Some people maintain multiple pension pots, accessing only one for drawdown while leaving others untouched. This is legitimate planning, though it's important to document genuine reasons for the arrangement.

3. Keep Records

If you ever need to demonstrate that your financial arrangements were made for legitimate purposes (not to avoid care costs), having clear records of your financial planning decisions and the reasons behind them is invaluable.

4. Insurance Options

Some people explore care fees insurance or immediate needs annuities. An immediate needs annuity involves paying a lump sum to an insurer in exchange for a guaranteed income paid directly to the care home for life. While expensive, it removes the uncertainty of how long care might be needed.

5. The Property Question

For those receiving care in a care home (not at home), the value of your property is usually included in the means test after 12 weeks. However, it's disregarded if your spouse, partner, or certain other dependants still live there. Many people use deferred payment agreements, where the local authority effectively puts a charge on the property to be repaid from the estate after death.

Proposed Reforms

The government has proposed a lifetime cap on care costs (previously set at £86,000), which would limit the amount any individual pays towards their personal care. However, this cap has been delayed multiple times and its implementation remains uncertain.

If introduced, the cap would change the planning landscape significantly, as fewer people would face unlimited care costs. However, accommodation and food costs (known as "hotel costs") would not be covered by the cap.

How Drawdown Compares to Annuities for Care Planning

An interesting comparison arises between drawdown and annuities when considering care:

• Annuity income: A guaranteed annuity income is straightforwardly assessed as income in the means test. The capital used to purchase the annuity is no longer part of your estate
• Drawdown: Both the income taken and potentially the remaining fund are assessable, which can mean a larger total assessment

This doesn't mean one is better than the other — the right choice depends on individual circumstances, health, family situation, and overall financial position. But it's a factor worth considering.

Key Takeaways

• Unaccessed pension pots are generally excluded from care means testing, but deliberately keeping them unaccessed to avoid fees could be challenged
• Once in drawdown, both income and potentially the remaining fund may be assessed
• Deliberate deprivation rules mean last-minute financial restructuring carries significant risk
• Planning early and documenting your reasons is the most effective approach
• Care cost reforms remain uncertain — plan based on current rules
• Professional advice is particularly valuable in this complex area

Speak to a qualified financial adviser for personal guidance on how your pension drawdown might interact with potential care costs. Early planning can make a significant difference to outcomes.

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