Could you please explain how someone’s drawdown pot is taken into account when working out how much you have to pay towards care costs.

For example, for the purposes of working this out, is the pot of money converted into an annuity income based on the person’s age and capital pot value.

And if so, what type of annuity is used? Is it a single life one regardless of whether the person in the home is married or not. And is the annuity on a level or increasing basis, and if increasing is it by RPI or a fixed rate per annum, say 3%.

Andrew

Rachel Vahey, AJ Bell Head of Public Policy, says:

When you or a loved one reaches the point where you need care it can be a traumatic time. Alongside the obvious emotional and physical upheaval, there are a range of financial questions that need answering. Top amongst these can be working out how the cost of the care is financed – by the person direct or by their council.

The first step is probably to work out what level of care is needed and whether you can afford it. The NHS might pay for care home costs if you have serious health needs. This doesn’t depend on your finance situation but there are strict rules for who qualifies.

A CARE NEEDS ASSESSMENT

Otherwise, a care needs assessment can decide what level of care and support you need, depending on how you are managing everyday tasks. Your local council (if you live in England or Scotland) can sort this. (Or Health and Social Trust if you live in Northern Ireland.)

If you do need care, then a financial assessment is needed to work out if you qualify for any funding. You will be asked about regular income and capital. For any joint savings, it’s usually assumed this will be split equally with your partner, unless you can prove otherwise.

You are usually expected to use part of your income to help pay for care. And if your capital is worth more than certain limits, you’ll usually need to pay the full costs of your care yourself. The limit is £23,250 if you live in England and £29,750 if you live in Scotland. If you live in Wales, the limit is £24,000 for care at home and £50,000 if you need a care home.

Understanding how your pension is treated in a financial assessment can be important. Pension flexibility – where you have the freedom to decide when and how much you want to take from a pension pot as an income or cash lump sums – has to be factored in.

For example, if you take cash in chunks or your whole pot in one go and put it into savings or invest it, your local council will treat it as an asset.

If you leave your pension pot untouched, then the council won’t count this when they calculate how much you can afford. (Remember, from 2027 the government is proposing this untouched pot will be counted for any inheritance tax, unless passed to a spouse or civil partner.) But when you reach Pension Credit qualifying age (State Pension Age – 66) then your local council will assume you’re receiving an income from your pension. They will do this by working out a ‘notional income’ – the income you would receive if you bought an annuity. 

If you are taking an income through drawdown, again the council may look at how much you would get if you bought an annuity and compare that notional income to the drawdown income you are taking, and then use the higher amount to assess your income.

The Department of Health’s guidance outlines that if the local authority is applying a notional income, then this must be the maximum income that could be drawn under an annuity.

The guidance doesn’t go further and define the basis that must be used to calculate the notional income that could have been bought with an annuity. But if the council is going to consider the maximum income, then it may assume a level single life annuity as this would give it the ‘biggest’ income.

However, in the absence of any detailed government guidance, you may want to check with your local council regarding the approach they take.

One final point. If you deliberately spend or give away money taken from your pension – including your tax-free cash – in order to get more financial help with care costs, then your local council may decide to include that money in your finances.

Assessing finances to see if you qualify for care funding can be a difficult time. If you need help, consider calling MoneyHelper (the Government’s guidance service) on 0800 011 3797 or Age UK on 0800 678 1602.

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