Pension and Long-Term Care: Using Pension Assets to Fund Care Needs

Long-term care is the single largest financial risk that many UK pensioners face in later life. The cost of residential care in the UK ranges from approximately £35,000 to £100,000 or more per year depending on location and level of care required, and with average care durations of two to three years (though many individuals need care for longer), the potential liability is substantial.

For UK pensioners and expats with UK pension assets, understanding how pension income and pension capital interact with care funding rules, means testing, and planning strategies is essential — both for those who may eventually need care in the UK and for those planning care in their country of retirement abroad.

This guide explains the UK's care funding framework, how pensions are treated in the means test, and what strategies exist to use pension assets to plan for care needs, as of 2026.

The UK Care Funding Framework

Local authorities in England, Wales, Scotland, and Northern Ireland are responsible for assessing and funding eligible care needs (the system varies between devolved nations; this guide focuses primarily on England). When an individual needs residential or home care:

1. Needs assessment: the local authority assesses the individual's care needs and determines eligibility.
2. Financial assessment (means test): if eligible for care, the individual's financial resources are assessed to determine their contribution.
3. Care funding: the local authority funds the shortfall between the individual's contribution and the cost of care (at assessed rates).

The Capital Threshold

As of 2026, the capital threshold rules in England are:

• Above £23,250 (the upper threshold): the individual is responsible for their own care costs in full ("self-funder"). No local authority funding applies until capital falls below this level.
• Between £14,250 and £23,250: the individual receives means-tested local authority support, with a "tariff income" assumed on capital above £14,250.
• Below £14,250 (the lower threshold): capital below this level is disregarded; only income is assessed.

The previous government had legislated for an £86,000 lifetime cap on personal care costs and more generous capital thresholds, due to commence in October 2025. In July 2024 the new government scrapped these charging reforms before they took effect. As of 2026 there is therefore no care cost cap, and the long-standing capital thresholds above continue to apply — always verify current figures with the relevant local authority or a specialist care funding adviser.

How Pensions Are Treated in the Means Test

The treatment of pension assets in the care means test is crucial — and the distinction between pension income and pension capital matters significantly.

Pension Income (In Payment)

If a pension is already in payment — whether from a DB scheme, SIPP drawdown, QROPS, or state pension — the income counts as assessable income in the means test. The individual's contribution to care costs is calculated from assessed income, with a retained sum (Personal Expenses Allowance or Minimum Income Guarantee for home care) left for personal use.

For most pensioners in residential care, the state pension and any additional pension income will form the bulk of their assessed income contribution.

Uncrystallised Pension Funds (Not Yet in Payment)

This is the critical planning point. Uncrystallised pension funds — i.e., pension assets not yet drawn — are generally disregarded in the means test for capital purposes. A SIPP worth £500,000 that has not been accessed does not count as a capital asset in the local authority's financial assessment.

This disregard has historically made pension funds highly valuable from a care planning perspective: assets held in a SIPP effectively do not count towards the capital threshold, meaning individuals with large uncrystallised pensions could potentially qualify for means-tested local authority care support while retaining significant pension wealth.

Important caveat: if pension assets are withdrawn and converted to cash or other capital, they immediately become assessable capital. Timing of pension access therefore matters for care funding purposes.

Deliberate Deprivation of Assets

Local authorities can challenge individuals who have deliberately reduced their capital to qualify for means-tested care support — this is known as "deliberate deprivation of assets," assessed by the local authority under the Care Act 2014 and its Care and Support Statutory Guidance (it is a local-authority means-test matter, not an HMRC rule). If a local authority believes an individual transferred assets, made excessive gifts, or structured their affairs specifically to qualify for care funding support, it can disregard those transactions and assess the individual as if they still held those assets.

Pension arrangements entered into for genuine retirement purposes well before the need for care would not typically be challenged under deprivation rules. But specific pension restructuring at or near the point of care need, motivated primarily by means-testing advantages, may be scrutinised.

Planning Strategies: Pension and Care

1. Maintaining Uncrystallised Pension Funds

For individuals who may need care in later life, the means-test disregard on uncrystallised pension funds argues for drawing pension income (rather than lump sums) and retaining as much of the fund in uncrystallised form as possible for as long as appropriate. However, this must be balanced against the 2027 IHT changes on pension assets, which bring unspent pension funds within the estate for inheritance tax purposes from April 2027.

The interaction between IHT planning (which may favour spending the pension fund) and care means-test planning (which may favour retaining it uncrystallised) requires careful analysis — there is no universal answer.

2. Immediate Needs Annuities

An Immediate Needs Annuity (also called a care annuity or care fees annuity) is an insurance product specifically designed for individuals who already need care. In exchange for a lump sum, the insurer pays the care home fees for life. Key features:

• The income from an INA is tax-free if paid directly to a qualifying care provider
• The lump sum is calculated based on life expectancy, care costs, and investment returns
• The insurer bears the longevity risk — if the individual lives longer than expected, they continue to receive care fees
• Pension lump sums (PCLS or UFPLS) can be used to fund an INA

For those who have uncrystallised pension funds, taking a tax-free pension commencement lump sum (PCLS) and using it to purchase an INA can convert pension capital into a care-cost guarantee — though the INA purchase itself is not reversible.

3. Care in the Country of Retirement

For UK expats retiring abroad, the care funding landscape differs entirely from the UK system. Local authority means-testing, NHS funding, and FSCS-protected care annuities are UK-specific:

• EU countries: many EU states have long-term care insurance systems. Germany, for example, has a statutory long-term care insurance scheme (Pflegeversicherung). France has a means-tested allocation personnalisée d'autonomie (APA). These systems may partially fund care but are rarely sufficient.
• Non-EU countries: the position varies widely. Many expat-heavy destinations (UAE, Thailand, Malaysia) have limited state care provision for foreign nationals, making private insurance and pension drawdown the primary funding mechanisms.

For expats, establishing long-term care insurance while still healthy — before underwriting becomes difficult — is strongly recommended. UK pension income and capital can be drawn down to fund care abroad, but there is no overseas equivalent of the means-test disregard on uncrystallised pension funds.

The Role of Financial Planning

Care funding planning requires coordination across:

• Pension structure: SIPP vs QROPS, uncrystallised vs in drawdown
• Estate planning: IHT implications of unspent pensions post-2027
• Insurance: whether long-term care insurance or an Immediate Needs Annuity is appropriate
• Property: the family home is not normally assessed for residential care while a spouse or dependent still lives there; it counts as capital once vacant
• Care assessment: understanding local authority eligibility, thresholds, and the needs assessment process

A joined-up financial plan — ideally prepared while the individual is still in good health — is far preferable to ad hoc decisions made at the point of crisis. Care funding decisions made at speed, without advice, in the context of an emergency care admission, are frequently suboptimal.

Power of Attorney

An often-overlooked aspect of care planning is ensuring that appropriate legal authority exists for family members or trustees to manage pension and financial affairs if the individual loses mental capacity. In England and Wales, a Lasting Power of Attorney (LPA) for property and financial affairs is the mechanism for this.

For UK expats, the position is more complex: an LPA granted in England and Wales may need to be recognised in the country of residence, or an equivalent local instrument may be required. This should be addressed as part of care planning.

Compliance Caveat

Care funding rules, capital thresholds, and pension means-test treatment are subject to change by government policy. The rules described in this guide reflect the position in England as of 2026; Scotland, Wales, and Northern Ireland have different provisions. Nothing in this guide constitutes financial, legal, or care planning advice. Always obtain advice from a specialist care funding adviser, ideally a member of the Society of Later Life Advisers (SOLLA), alongside pension and tax advice. The value of pension assets can fall as well as rise.

How Global Investments Can Help

Global Investments helps internationally mobile UK nationals think through the intersection of retirement income planning, long-term care risk, and estate planning. For expats who may eventually return to the UK for care, or who need care in their country of retirement, we can help model the financial impact and identify the most appropriate pension strategy alongside care-specific planning.

We work with specialist care funding advisers and legal professionals where appropriate to ensure the full picture is addressed.

Contact us for a confidential consultation on retirement income and care planning.