Social care funding: how your pension, house and savings are means-tested

Welcome to part two of our series on how to plan and pay for long-term social care in later life. 

Part one covered why most people will pay some, or all, of their care fees. We also explained why England’s new social care cap doesn’t stop steep bills. 

Today we’ll see how the social care means test applies to your assets.

The first step to getting help with social care funding is to ask your local authority1 for a care needs assessment.2 This determines your eligible care needs.

Your local authority is obligated to fund, at least partially, your eligible care needs – if you qualify for financial help.

That’s a big if.

Notice I’ve highlighted the word ‘eligible’. Why? Because any social care funding you do receive only goes towards care that your local authority deems necessary.

What if you or a loved one needs help with washing, or dressing, or preparing meals, but your local authority doesn’t agree? Then that care must be self-funded, organised some other way, or done without.

Paying for ineligible care doesn’t count towards your social care cap either.

The gap between genuine needs and official provision explains why some are forced to choose between large bills or being unsupported.

The social care means test

No matter how healthy your finances look today, the risk of being sucked into a financial black hole later in life makes it worth knowing how the system works.

Most long-term social care services are means-tested.

The means test is officially known as a financial assessment. It’s undertaken by your local authority. The test should follow your care assessment if you got an ‘eligible needs’ verdict.

Your financial resources are divided into capital and income for the purpose of the means test.

(Note that social care defines those terms quite differently from their common meanings.)

To gain social care funding, your capital and income totals must both fall below certain thresholds.

Some assets don’t necessarily count towards the means test. Your home is likely to be your most important asset that’s sometimes excluded.

The rest of this post explains which assets count as capital, which as income, and when they’re excluded. (Or disregarded in the jargon.)

In part three we’ll explain how your capital and income determine your funding fate, when pitted against the social care thresholds.

So what does capital and income actually mean in the convoluted world of social care?

Social care funding: capital

Your means-tested capital includes:

• Cash stored in bank or building society accounts, ISAs, and National Savings Certificates
• Investments in stocks and shares ISAs and general investment accounts. (i.e. not in pensions)
• Property – your home is exempt in certain scenarios. (See the home section below)
• Premium Bonds
• Trusts – sometimes exempt, sometimes not – seek advice
• Business assets
• Land

Pensions rarely count as capital except for a few exceptions. We’ll cover those in the pensions section below.

Debts secured against an asset are deducted from its value. Ten per cent is docked from an asset’s value if selling it incurs significant fees. 

Disregarded capital

‘Disregarded’ capital is not included in the financial assessment. Capital not counted includes:

• The value of your main or only home if:

(1) Your partner or a dependent family member lives there. (Your live-in carer may also count). 

(2) You need care at home, not residential care.

• Personal possessions
• The surrender value of life insurance policies
• Investment bonds with a life assurance element (as bought from life insurance companies). A local authority may count these assets if they believe you bought them to avoid care fees
• Personal injury payments held in trust or administered by a court
• Trust money – depending on how the vehicle is structured

Social care funding: income

Your means-tested income includes:

• Private / workplace pensions (exceptions below)
• State pension
• Annuities
• Employed / self-employed income (in Northern Ireland and Scotland)
• Rental income
• Investment bond withdrawals
• Trust income
• Most benefits (some exceptions)

Your income should be calculated after tax.

Disregarded income

Some income is disregarded completely, some only partially:

• Earnings from employment or self-employment (England and Wales only)
• Pensions in some cases – see pensions section
• Interest from savings (where this is assessed as capital instead)
• Disability Living Allowance or Personal Independence Payment mobility components (but not care or daily living components)
• Attendance Allowance
• Pension Credit Savings Credit
• Income in kind (i.e. payments other than in money)
• Winter fuel payments
• War Pension Scheme payments except Constant Attendance Allowance
• State Pension Christmas Bonus
• Personal injury trust payments
• Child Tax Credit, Child Benefit, or Guardian’s Allowance
• War widow’s and widower’s special payments

Capital and income notes

Your assets should be classified as capital or income but not both. For example, money moved from your pension into an ISA will typically be treated as capital instead of income. It shouldn’t be double-counted.

Your local authority must assess you as an individual. Resources that belong solely to you don’t count towards your partner or spouse’s means test.

Joint assets like bank accounts or property are split 50/50 unless you can show evidence of an unequal share.

The shared finances of unmarried couples are treated differently. (Usually worse than their legally bound counterparts.)

Deprivation of assets

If the local authority thinks you’ve arranged your financial affairs to deliberately avoid care fees, it can invoke the deprivation of assets rules.

That enables it to count assets you’ve transferred to someone else, or otherwise disposed of, as if you still own them. 

Such assets are known as notional capital and notional income. Those figures are added to your running capital and income totals. 

Your local authority can’t just assume you’re fiddling the books. It must show that avoiding care fees was a significant factor in your decision to dispose of the assets under investigation. 

There is no time limit preventing past disposals being viewed as ‘deprivation of assets’, however. For example the Inheritance Tax gifting rules do not apply. 

But a ‘deprivation of assets’ claim can’t stand if you were healthy at the time of disposal and couldn’t have foreseen a need for care. 

Timing and previous patterns of gifting count as evidence. 

• Spending savings on a once-in-a-lifetime cruise shortly before your means test wouldn’t look good. 
• Neither would converting assets into a display case of antiques that you claim as personal possessions. 
• Nor treating the family to new cars, or a house ‘sold’ at a fraction of its real value. 

Local authorities can seek debt recovery from you and even third-party beneficiaries of your assets (e.g. family members). They can do this if they believe you’ve underpaid care fees in a case of deliberate deprivation. 

You can challenge a deprivation of assets decision via your local authority’s complaints procedure. 

You must be allowed to submit evidence to substantiate your version of events. 

Finally, even failing to claim State benefits can count as deprivation of assets. 

Check your benefits eligibility using this tool from Age UK. 

When does your home count towards the social care means test?

Your home only counts towards the social care means test if you or your partner require permanent residential care. Even then, your home is disregarded if it’s occupied by any of the following:

• You
• Your partner / spouse
• A family member who is over age 60 or is incapacitated
• A child you’re responsible for

The definitions of family member, occupied, and incapacitated are precise. But they’re also quite wide-ranging, including grandchildren, step-, adoptive- and in-law relationships.

The family member concerned must have been living in the property before you went into residential care.

It’s also possible for a local authority to disregard your home if your long-term carer gave up their home to look after you. Your carer needn’t be related.

If you and your partner both go into residential care then your home is means-tested. This could entail losing existing funding because your property is no longer disregarded.

Ownership

The value of the house is automatically split 50/50 where you and your partner own it as joint tenants. (Joint owners with a survivorship clause in Scotland).

You can divide ownership in any proportion as tenants in common. (Joint owners in Scotland).

Some solicitors tout a tenancy in common as a method of reducing care home fees.

For example, one partner’s share could be put into a trust controlled by their children. When that partner dies, legal ownership passes to the children. Meanwhile the trust apparently protects the right of the surviving partner to continue living in their own home.

If the surviving partner later goes into residential care, then only their share of the home should count towards fees. That’s assuming everything works as advertised.

A brief look into this arrangement suggests it’s fraught with risk for the surviving partner when their interest conflicts with the children. It could also fall foul of the deprivation of assets rules.

Valuation

If your property is included in the means test then it’s assessed at its present market value:

• Minus any mortgage or other loan secured upon it. This can have consequences for equity release.
• Minus 10% of the value to cover selling expenses.

Precise valuation isn’t necessary if you and the local authority agree your home’s value pushes you comfortably over the upper social care threshold.

Once the property is sold, your situation is assessed based on the actual proceeds you have left.

Equity release

Equity release schemes reduce the amount your home contributes to your means-tested capital. But note this only comes into play when your property is no longer disregarded.

Meanwhile, equity release can lead to complications such as:

• Adversely affecting your social care funding because the payouts increase your capital (lump sums) or income (regular payments).
• Reducing your means-tested benefits.
• Blocking your ability to pay for residential care via a deferred payment agreement (see below).
• Penalising you for moving home, or living with a new partner.

Equity release schemes trigger the sale of the home when the last of the joint-applicants moves into residential care. That makes these schemes ill-suited to funding residential care.

Downsizing is a simpler form of equity release.

Note your share of the released capital becomes eligible for means-testing if your partner downsizes while you’re in residential care.

The 12-week property disregard

The local authority should disregard your home from your financial assessment for the first 12-weeks after you permanently move into residential care. This applies if the remainder of your capital falls below the upper threshold.

This disregard means the local authority is liable for more of your care home fees until you can sell your property, or agree a deferred payment agreement.

In Scotland, the 12-week property disregard is more flexible. It can apply regardless of thresholds, and also to temporary care home stays. 

Deferred payment agreement

A deferred payment agreement protects you from being forced to sell your house in your lifetime to pay for permanent residential care. 

This option enables you to defer care home fees when:

• Your house is means-tested
• You can’t or don’t want to sell it
• There are limited other means at your disposal to pay the fees
• You can’t pay all your fees from your income
• The remainder of your capital (not including your share of the home) falls below these thresholds:

– England and Northern Ireland: £23,250

– Scotland: £18,000

– Wales: £50,000

Signing up for a deferred payment agreement effectively means your local authority loans you the money to pay residential care fees. Your home acts as security for the loan.

The loan is repaid when you sell your home, pay some other way, or you pay out of your estate after death.

You can rent out your property and use the money to pay some of your fees or loan. Some councils may even supply tenants.

Your local authority can charge administration costs and interest on your loan.

Check that any existing loans secured on your home – such as mortgage or equity release – don’t preclude a deferred payment agreement.

Why not just sell your home instead and use the proceeds to pay your fees, then invest or save the rest?

Apart from tax implications, a deferred payment agreement lets you benefit if your home rises in value. Of course, that bet can go the other way too.

Local authorities must also consider requests to use deferred payment agreements to top-up your care.

In other words, it can be used for ineligible needs that aren’t covered by your official care plan.

Your local authority uses your available house equity to decide if your request is sustainable over time.

You can also request a deferred payment agreement if your other capital assets are slightly over the threshold and not easily accessible.

Pension exceptions

Private and workplace pensions are normally classified as income. However, pensions can count as capital, or be disregarded altogether.

Firstly, 50% of your private/workplace pension or retirement annuity is disregarded if:

• You need residential care
• The money is paid to a spouse or civil partner
• They do not live in the same care home

This disregard doesn’t apply if you share less than 50% of your pension income. It can also affect your partner’s means-tested benefits.

Investments left untouched in a defined contribution pension pot are disregarded if you’re below State Pension Age. This does not count as deprivation of assets.

If you take your pension as a regular income then it counts as… wait for it… income. Defined benefit pensions and annuities are treated the same way.

But pension amounts taken as an occasional lump sum should be classified according to the product the assets land in.

Likely depots such as bank accounts, stocks and shares ISAs, and property all count as capital.

Note: it’s not crystal clear when an occasional pension lump sum counts as capital and when it counts as income. It could be treated either way but it can’t be treated as both. The defining factor is regularity. Therefore monthly withdrawals can be assumed to fall in the income camp. 

Drawing on your pension

Once you reach State Pension Age, the local authority can treat you as taking your private pension – whether or not you actually do so.

If you don’t take a pension income then the local authority can estimate a notional income as if you bought a lifetime annuity with your pot.

This annuity income estimate can come from your pension provider or the Government Actuary’s Department.

Your local authority can also count the annuity rate if they decide you’re drawing down too slowly.

In this case, they must disregard your actual pension income to avoid double counting.

An annuity estimate could well imply a higher income than you actually drawdown using a prudent withdrawal rate. This would penalise you for conserving your portfolio. We’ll dig into this later in the series. 

If you drawdown faster than the annuity rate then they’ll just use your actual pension income.

Mean test

Once the local authority calculates your total capital and income the next step is to see if you qualify for social care funding. Here the relevant thresholds and minimum income allowances come into play.

Those are not easy tests to pass but the idiosyncrasies of the system can throw up surprising results. We’ll cover that in part 3 on social care thresholds. 

Take it steady,

The Accumulator

1. Contact your Health and Social Care Trust in Northern Ireland. [↩]
2. Contact the adult social services department. [↩]