Care homes, your pension, and what you leave behind

Both me and my wife have had our dads in care in the last five years. Mine is still there. He went in for palliative care, council funded, and the home did what nobody expected and revived him. More than a year on he is likely to stay for good, and for a number of years. He had taken equity release on his house, and the care home now needs what is left of it, which will not cover even one more year. The fees are more than a hotel. Then you sit with it for a while and realise it is a hotel with round-the-clock care, all your meals and something to do in the afternoons, and the number stops looking mad and starts looking like what it costs.

What struck me was how little of it had appeared in our own retirement planning. The plan had a spending figure, a State Pension date and a target age. It did not have a line for the years when one of us might need £1,300 a week of care, or a view on what happens to the pension pot when the second of us dies. Those are the two things this post is about, because they turn out to be connected.

What care actually costs

The averages for 2026 are about £1,300 a week for residential care and about £1,535 a week for nursing care, which is roughly £67,000 and £80,000 a year. Dementia care costs more. The South East is dearest and the North East cheapest, with a gap of around £25,000 a year between them for the same nursing place. Fees rise faster than general inflation, because care is mostly wages.

The other number that matters is how long. Most stays are short by the standards of a retirement plan: a few years, sometimes less than one. But "a few years at £70,000" is £200,000 or more, arriving at the end of life when the pot is at its smallest and there is no earning your way out. It is the tail risk that a spending rule like 4% simply does not see.

Who pays: the means test, in plain English

In England the council pays only once your capital is below £23,250, and pays in full only below £14,250. Between the two you contribute £1 a week for every £250 of capital above the lower limit, on top of your income. Those thresholds have been frozen for fifteen years. The £86,000 lifetime cap on care costs that was legislated in 2022 and due in October 2025 was cancelled, and the plan to lift the upper limit to £100,000 went with it. There is no cap. You pay until you are down to £23,250, and after that your income still goes towards the bill, less a small personal allowance.

Your home counts as capital if you go into residential care and nobody else qualifying lives there, after a twelve-week disregard. It does not count while a spouse or partner still lives in it, which is why a couple's exposure is usually the first person's savings and pension, not the house. Councils offer deferred payment agreements so a home need not be sold in a hurry. And if the need is primarily a health need, NHS Continuing Healthcare pays the whole cost regardless of means; it is worth pushing for an assessment, because the difference is everything.

Pension income, State Pension and defined benefit pensions all count as income in the test. A pension pot you have not touched is more interesting, and this is the part that matters for a drawdown plan.

How a pension pot is treated when care starts

Money sitting untouched in a defined contribution pension is disregarded as capital. Below State Pension age it is ignored entirely. From State Pension age the council can treat you as if you were taking an income from it whether or not you are: a "notional income", worked out as roughly what the pot would buy as a lifetime annuity. Income you actually draw counts as income, and if the notional figure is applied your real drawdown is disregarded so it is not counted twice.

Two practical consequences. First, a large untouched pot does not push you over the capital limits the way a large ISA does, but it does not shield the income either. Second, a couple's plan that has been drawing mainly from one person's pension has, without meaning to, moved money out of a disregarded wrapper and into countable savings. That is not a reason to change the plan. It is a reason to know it.

Deliberately giving money away or spending it down to get under the limits is treated as deprivation of assets, and councils can assess you as though you still had it. The test is intent, and the case law is unkind to anyone who did it after a diagnosis.

Four ways to pay, and what each does to the plan

From the pot. The obvious route and the expensive one, because care fees drawn from a pension arrive as taxable income. Sandra, our regular example, needs £70,000 a year of care at 86 with a full State Pension as her only other income. To net £70,000 she has to draw about £89,000 gross a year: 25% of each withdrawal is tax-free, the rest stacks on top of her State Pension and much of it lands at 40%. Three years costs the pot roughly £267,000 to pay £210,000 of fees.

From the ISA and savings. Pound for pound. £70,000 of fees is £70,000 out. Which is why the order in which a couple has been spending their money over the previous twenty years suddenly matters.

An immediate needs annuity. A one-off payment to an insurer buys an income for life that is paid straight to the care home, and it is tax-free provided it goes to a registered care provider. The price depends on the person's health, so it is quoted after a medical assessment, and it is typically worth a few years of fees. The trade is the same as any annuity: if care lasts longer than expected the insurer loses; if it is short, you have overpaid, unless you buy capital protection. What it buys is a ceiling on the cost, which for the surviving partner can be the whole point.

The house. Sale, equity release, or a deferred payment agreement with the council. For a single person in residential care it is usually the biggest asset in the test and the one most people are keenest to protect, in that order.

What happens to the pension when you die

This is where care and death benefits meet, because the money that pays for one is the money that would have been the other.

If you die before 75, a defined contribution pension can be passed on free of income tax, as long as it is paid out or moved into the beneficiary's own drawdown within two years. If you die at 75 or over, whoever inherits pays income tax on what they draw at their own rate. Those rules are unchanged.

What changes is inheritance tax. From 6 April 2027, under the Finance Act 2026, unused pension funds and most lump sum death benefits count as part of your estate. Death in service benefits and lump sums left to charity are the main exceptions. A spouse or civil partner still inherits free of inheritance tax, so for most couples the bill arrives on the second death. Then an estate over the nil-rate bands pays 40% on the pension, and if the second death was at 75 or over the children pay income tax on what remains as they draw it. Two taxes on the same pounds, and on a higher-rate child that is roughly two thirds of the pot gone. The 2027 change in full.

Defined benefit pensions behave differently: they usually pay a survivor's pension, typically half to two thirds, and then stop. A lifetime annuity stops with you unless it is joint life or inside a guarantee period. An immediate needs annuity stops with you too, unless you paid for capital protection.

Putting the two together

Here is the connection. Until now the standard advice for anyone worried about care or inheritance was the same: leave the pension alone as long as you can. It was outside the estate, it was disregarded in the means test, and every other pot was worse on both counts. From April 2027 the inheritance half of that argument goes. A pension left untouched to the second death is now inheritance-taxed and then income-taxed. A pension spent on care in your eighties is taxed once, at your rate, and reduces the estate. The pot that was the best thing to leave behind has become, for many families, the best thing to spend.

None of that makes care cheaper. It changes the order. For a couple with a pension, an ISA and a house, the question is no longer "how do we keep the pension safe" but "which pot pays for care if it comes, and which pot do we want to be the one left over". For most people the honest answer to the second question is now the ISA and the house, not the pension, which is the opposite of what it was two years ago.

What the simulator does with this

Two of the planner's optional cards exist because of these conversations. "What if one of us needs care?" lets you pick who, from what age, for how long and at what yearly cost, and whether it is paid from the pot or by an immediate needs annuity bought from savings when care starts; the story then shows what the care years do to the plan and how often the money still lasts. "What if one of us dies first?" runs the survivor's years as a separate plan: one State Pension, the survivor's share of any DB pension, the pot passed across, spending reduced. The calculator's inheritance tax view applies the 2027 rules to whatever is left, and the compare page will run "care from 85" beside "no care" on the same thousand market futures so you can see the cost as a number rather than a worry.

What it does not do is the means test. It assumes you are paying, because for anyone with a pension worth planning around, you will be.

The list we wish we had been given

• Lasting powers of attorney, both kinds, for both of you, now. There are two, one for property and financial affairs and one for health and welfare, and you need both. I will be honest about it: the forms are complicated, getting them registered is a slog, and running them afterwards is worse, because everyone you then deal with, the council, the care home, the mortgage provider, the utility companies, is slow to respond and buried in red tape. It is a nightmare. It is also the only thing that lets you act at all, so do it while everyone is well and nobody is in a hurry.
• An expression of wishes on every pension, reviewed after any death, divorce or grandchild. It is not binding but trustees follow it, and after 2027 who receives the pot decides how much tax it pays.
• Know the local fees, not the national average. Ring two homes near you and ask the weekly rate for a self-funder. Put that number, not £60,000, in the care card.
• Ask for a Continuing Healthcare assessment whenever the need is medical. Nobody offers it; you have to ask.
• Decide the funding order before you need it. Which pot pays for care, which pot is meant to be left. After April 2027 that answer has changed for most couples.
• Run the survivor plan. The person left behind lives on one State Pension and half the DB pension, in the same house, with the same bills. Most plans never look.

If you have been through this and the rules worked differently for you, or I have something wrong, use the Contact button at the top of the page. Corrections go in with credit, as always. And to those of you in the middle of it: it is worse than the numbers and better than you fear, and the numbers are the part you can do something about.

Sources for the figures: care home fee averages from carehome.co.uk and Lottie (2026); capital limits and the cancelled cap from the House of Commons Library and the 2025 to 2026 local authority charging circular; pension treatment from the Care and Support Statutory Guidance, Annexes B, C and E; death benefit and inheritance tax rules from HMRC's technical note and the Finance Act 2026; immediate needs annuity tax treatment from HMRC manual IPTM6210 and MoneyHelper.