People are rushing to give away pension savings before major inheritance tax changes arrive in April 2027. But experts are warning that many could be putting their future funding of social care at risk.
Under proposals announced by the Government, unused defined contribution pension funds are expected to become subject to inheritance tax from April 2027. The move has prompted a surge in older people withdrawing large sums from pensions and gifting money to children and grandchildren in an attempt to reduce future tax bills.
But legal and financial professionals are increasingly concerned that many families are making hasty decisions without properly considering how they would pay for care later in life.
With residential care fees now regularly exceeding £8,000 a month (and significantly more in some parts of the country) running out of money can have serious consequences.
Perhaps more importantly, councils are becoming far more aggressive in investigating whether people have deliberately given away assets to avoid paying for care.
This is known as “deprivation of assets”, and it can leave families facing unexpected financial problems years later.
What is deprivation of assets?
When someone applies for local authority support with social care costs, councils carry out a financial assessment to determine whether the person should pay for their own care.
If officials believe someone intentionally reduced their savings or property to avoid care fees, they can decide that “deprivation of assets” has taken place.
Common examples include:
- Gifting large sums of money to relatives
- Transferring ownership of property
- Placing money into trusts
- Selling assets below market value
- Extravagant spending
- Converting savings into assets that may not count in a care assessment
Many people wrongly assume there is a fixed time limit on how far councils can investigate. In reality, there is no seven-year rule equivalent to inheritance tax rules. Local authorities can look back many years if they believe avoiding care fees was a significant reason behind the transfer.
If deprivation is found, the council may treat the person as though they still own the money or assets that were given away. This is known as “notional capital”. In some situations, authorities may even attempt to recover money from family members who received gifts.
A common misunderstanding is that inheritance tax planning rules and social care funding rules operate in the same way. In reality, they are entirely separate regimes. A gift that may fall outside an estate for inheritance tax purposes after seven years can still be examined by a local authority when assessing whether someone deliberately reduced assets to avoid care fees.
With people living longer and spending more years in later-life care, the financial impact of getting these decisions wrong can be substantial.
Why the pension changes matter
The planned 2027 pension tax reforms are changing behaviour because pensions have historically been viewed as one of the most tax-efficient ways to pass wealth to the next generation.
Now, many retirees are considering withdrawing pension funds early and making lifetime gifts. But professionals warn that decisions driven purely by inheritance tax concerns can create major risks later.
Someone in good health today may still need residential or nursing care in the future, particularly as people are living longer.
If substantial assets have already been transferred away, the person may struggle to fund their care privately; while also facing questions from local authorities about whether the gifts were intended to reduce assets below funding thresholds.
David Hulse, head of the independent financial planning department at Hugh James, said: “Many families are understandably reviewing their estate planning following the proposed pension inheritance tax changes, but decisions made purely to save tax can create significant problems later if future care needs are not properly considered.
We are increasingly advising clients to take a balanced approach; one that considers inheritance tax efficiency alongside long-term financial security, potential care costs and the risk of deprivation of assets challenges from local authorities. What may appear to be sensible gifting today can become far more complicated if health circumstances change in later life.”
What evidence should families keep?
Experts say careful record-keeping is becoming increasingly important.
Families making significant gifts should keep:
- Written financial advice
- Notes explaining why gifts were made
- Evidence of retirement planning
- Cashflow forecasts showing enough money was retained for future needs
- Medical information about the person’s health at the time
- Records showing any history of regular gifting
This evidence may later help demonstrate that the main purpose of the gift was genuine estate planning or family support; rather than avoiding care fees.
Without proper documentation, defending a deprivation of assets allegation can become much harder.
Timing can make a difference
One of the biggest factors councils consider is whether care needs were foreseeable when the transfer happened.
For example, gifts made decades before any health problems arose may be easier to justify than transfers made after a dementia diagnosis or increasing frailty.
Authorities will often examine:
- The person’s age
- Their health at the time
- Whether they were already receiving care
- The size of the gift
- Whether enough money was retained to remain financially secure
Professionals say people should avoid focusing exclusively on inheritance tax savings while ignoring future care costs.
What funding options are available?
People needing care may fund it in several ways.
Some will pay privately using pensions, savings or property wealth.
Others may qualify for local authority support if their assets fall below the relevant thresholds. In England, people with more than £23,250 in capital are generally expected to fund their own care, while in Wales the upper capital limit is currently £50,000.
However, even where someone qualifies for local authority funding, families can still face significant costs. Many care homes charge more than the rates councils are willing to pay, meaning relatives are often asked to pay “top-up fees” to cover the shortfall. These additional payments can amount to hundreds of pounds per week and frequently come as a shock to families who believed care would be fully funded once savings fell below the threshold.
In certain cases, individuals with substantial healthcare needs may qualify for NHS Continuing Healthcare (CHC) funding, which is not means-tested. Unlike local authority funding, CHC is fully funded by the NHS and can cover the entire cost of care, including care home fees.
Eligibility depends on the type and amount of care required to meet a person’s health needs rather than their savings or property. Individuals with severe dementia, complex medical conditions or significant nursing needs may potentially qualify. However, securing CHC funding can be difficult. Assessments are highly detailed and many applications are initially refused, meaning families often need professional advice or support when challenging decisions.
Where successful, NHS Continuing Healthcare can protect individuals from exhausting their savings on care fees and may significantly reduce pressure on family finances.
One option sometimes overlooked is the use of specialist immediate needs care annuities. These products allow individuals to pay a lump sum in exchange for a guaranteed income paid directly towards care fees for the rest of their life. While not suitable for everyone, they can provide certainty over future care costs and help reduce the risk of rapidly depleting remaining assets.
But obtaining professional advice early is often critical.
Powers of attorney could create additional risks
Another growing concern involves attorneys acting under Lasting Powers of Attorney (LPAs).
As inheritance tax worries increase, some families are encouraging attorneys to make large gifts on behalf of elderly relatives.
But attorneys must always act in the donor’s best interests. They are legally required to consider the person’s future financial security and care needs; not simply reduce inheritance tax. Large gifts made without proper authority could later be challenged by the Office of the Public Guardian, the Court of Protection or local authorities.
A careful balance is needed
The upcoming inheritance tax changes are understandably causing anxiety for many families.
However, professionals say rushing to give away wealth without considering future care costs could prove to be a costly mistake.
With councils facing mounting financial pressures, scrutiny of historic gifting is only likely to increase.
Experts say the safest approach is balanced planning; reducing inheritance tax exposure where appropriate, while still ensuring enough money remains available to provide security and dignity later in life.
Lisa Morgan is head of the nursing care fee recovery team at Hugh James.