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Ask the experts. Rachel Vahey is here to answer questions on pensions. If you'd like a question considered for a future edition, send it in now.
If you go into a care home and have a drawdown pension the local authority can compare the income you take from pension drawdown against the income you would receive if you bought an annuity on a single life basis with your entire pension fund.
If the annuity produces a higher income and you decide to stick with drawdown, you will be forced to take more out of your drawdown pension plan to compensate for the difference in the two figures.
If the council has come back with an annuity quote on a single life basis, and you decide you will purchase an annuity on a joint life basis to provide protection for a spouse then given a joint life annuity will most likely provide a lower income than a single life annuity how would this be treated by the council?
Andy
Rachel Vahey, AJ Bell Head of Public Policy, says:
Needing care – whether for yourself or a loved one – can be a stressful and emotional experience. On top of coming to terms with the changes in daily life, there’s also the worry of how to pay for that care. One of the first things to consider is whether you’ll be paying for care yourself or if help is available from your local council or the health service.
If you’re assessed as needing social care, the next step is a financial assessment to determine if you’re eligible for any funding support. You’ll need to provide details about your income and savings. If you share savings with a partner, these are usually split equally for the assessment unless you can show they’re owned differently.
You are typically 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 £35,000 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.
What you need to understand
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 – must 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 April 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 – which is currently 66, but due to slowly increase to 67 starting from April 2026) 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, 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 and Social Care’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’ starting income. However, different councils will take different approaches. And, in the absence of any detailed government guidance, you may want to check with your local council regarding the approach they take.
Remember this is a notional amount for working out funding support for care – you shouldn’t necessarily then be forced to take that amount. You should be able to continue to take a lower amount if you want. If you then go ahead to buy a joint annuity, then in theory this could affect your financial assessment, but you will want to contact your local council to establish their views.
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. And theoretically your council may take the same approach if you choose to use your drawdown fund to buy a joint annuity rather than one based on a single life.
Where to get further help
Assessing finances to see if you qualify for care funding can be difficult and stressful. If you need help, consider calling MoneyHelper (the Government’s guidance service) on 0800 011 3797 or Age UK on 0800 678 1602.
Rachel Vahey: Head of Public Policy
Rachel is AJ Bell's Head of Public Policy. She helps financial advisers and planners understand the changing pensions and savings environment, as well as how new legislation and regulation affects them and their clients.
Rachel...
