Pensioners face a potential £54,000 tax trap if they save extra money in their pension pots to cover future care costs, new analysis reveals.
Care home fees have risen by nearly 20 per cent in the past two years, with residential care now costing an average of £949 per week.
Starting in April 2027, Labour’s proposed changes to inheritance tax could mean that pension savings left unused by retirees could be taxed at rates as high as 90 per cent —but only if they don’t need care.
This creates a tough situation for families, as they have to save for potential care costs while also facing the risk of huge taxes on any savings they don’t use.
The cost of care is a huge issue right now. For example, nursing home fees are £1,267 a week, up from £1,074 in 2021-22.
For those who need live-in care at home instead, the average cost is £228 per day, which adds up to nearly £83,000 a year in England.
Anyone with savings and assets above £23,250 must pay their full care costs in England
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Anyone with savings and assets above £23,250 must pay their full care costs in England.
The likelihood of needing care increases dramatically with age, affecting less than one per cent of those aged 65-69 but rising to 10.8 per cent for those aged 85 and over. Around 2.5 per cent of people aged 65 and over were living in care homes in 2021.
Wes Streeting, Health Secretary, has acknowledged there is an “imbalance” in how social care costs are shouldered by individuals and families.
The scale of the crisis was highlighted during an LBC radio call, where a listener revealed she is paying £85,000 annually for her 97-year-old mother’s dementia care.
Streeting told the caller: “I think that where we’ve got to as a country is a situation where I think the burden on individuals and families and the state is imbalanced, and it’s almost a game of pot luck and chance.”
The family is rapidly depleting savings and proceeds from selling their mother’s home to cover the costs.
Analysis shows retirees need pension savings of £340,000 to achieve a “moderate” standard of living in retirement, rising to £400,000 if they need to fund nursing care.
From April 2027, private pensions will be drawn into the inheritance tax net, creating what experts call a “tax penalty risk”.
Tom Selby of AJ Bell warns: “Paying for care in your later years can represent a huge cost but nobody knows for sure whether or not they will need care.”
The situation is particularly challenging for younger savers. A 30-year-old on an average £36,000 salary would accumulate just £162,000 by retirement age, leaving them £178,000 short of the recommended amount. This shortfall increases to £238,000 if nursing care is needed.
Reforms to address the care funding crisis face a lengthy timeline, with proposals not expected until 2028.
An independent commission, to be led by Baroness Louise Casey, will begin exploring the future of social care this spring.
Streeting defended the long-term approach, saying a cross-party consensus is needed because “politics has torpedoed good ideas” in the past.
The Health Secretary has suggested an insurance system could be one funding option under consideration. The commission will examine all possible funding solutions, with an initial report due in 2026.
Streeting said the commission would focus on “action during this parliament” rather than just building evidence.
Caroline Abrahams, director at Age UK, warns that many people wrongly believe social care is part of the NHS and therefore free.
She said: “Unless you have pronounced care needs and very few assets it will be down to you or your family to meet the costs.”
Abrahams explained that homeowners face additional pressure as property values are considered when calculating care home costs, though not for home care services.
She added: “This affordability problem with social care has been getting steadily worse as the state-funded system has contracted over the years, leaving many older people who would never consider themselves particularly well off to foot stinging bills.”