Using pension drawdown to pay for care: tax tips

By · Published 2026-06-30 · Last reviewed 2026-09-18

Three stacks of British one-pound coins on a white surface.
Photo: Images_of_Money, CC BY 2.0

Pension drawdown lets you take money from a defined contribution pension as you need it, so you can pay care costs flexibly. Usually up to 25% can be taken tax-free and the rest is taxed as income, so spreading withdrawals across tax years can keep more of it in lower tax bands. Councils can count drawdown funds as notional income in a care financial assessment.

Pension drawdown lets you leave a defined contribution pension invested and take money out as and when you need it, which can suit care costs that change over time. Usually up to 25% of the pot can be taken tax-free and the rest is taxed as income in the year you take it. Planning how much to take each tax year, alongside other savings, can reduce the tax paid.

This is an area where tax rules, care funding rules and Inheritance Tax all interact, so it is worth understanding the basics before making withdrawals.

How does flexi-access drawdown work?

With a defined contribution pension, you can usually take money as cash, buy an annuity, or move the pot into flexi-access drawdown. In drawdown, the pot stays invested and you choose how much to withdraw and when. The minimum age is normally 55, rising to 57 from 6 April 2028.

Key tax points:

Drawdown is not available from a defined benefit (final salary) pension, which pays a set income instead.

How can you reduce the tax on withdrawals?

Use the lower tax bands each year

For the 2026/27 tax year, GOV.UK shows a standard Personal Allowance of £12,570 and a basic rate band up to £50,270 in England, Wales and Northern Ireland. Scotland has different bands. The Personal Allowance is reduced for incomes over £100,000.

Because withdrawals are taxed in the year they are taken, spreading them across tax years can keep more of the income in the Personal Allowance and basic rate band, rather than pushing it into higher rates. A large single withdrawal can mean paying tax at a higher rate than necessary.

Blend tax-free and taxable money

Rather than taking all the tax-free cash at once, some people take smaller withdrawals where part of each one is tax-free. This can lower the overall tax paid each year.

Think about the order of spending

Cash savings, ISAs and the tax-free part of a pension can all help pay for care without adding to taxable income. Using them in the right order, alongside the State Pension and any other pensions, can smooth tax over several years. The best order depends on your circumstances and on Inheritance Tax plans.

Watch for emergency tax

A first flexible withdrawal is often taxed using an emergency code, which can take far too much. You can reclaim overpaid tax from HMRC during the tax year using form P55, P50Z or P53Z, depending on your situation, or wait for it to be corrected after the year ends.

The money purchase annual allowance

Once you take taxable money flexibly from a pension, a lower money purchase annual allowance applies to future contributions to defined contribution pensions. For most people funding care in later life this does not matter, but it can for anyone still working and paying in.

How does drawdown affect a council financial assessment?

In England, the Care and Support Statutory Guidance sets out how councils treat pension pots:

So leaving a pension untouched does not keep it out of the assessment. Taking large sums and giving them away to reduce care charges could also be treated as deprivation of assets.

Scotland, Wales and Northern Ireland have their own charging rules. Ask the council or Health and Social Care Trust how it treats pensions.

What about Inheritance Tax and passing on a pension?

Unused pension pots have often been outside the estate for Inheritance Tax. That is changing: from 6 April 2027, most unused pension funds and death benefits will be included in the estate for Inheritance Tax.

Income Tax on an inherited pension also depends on age. GOV.UK explains that beneficiaries generally pay no Income Tax if the owner died before 75, while withdrawals are taxed at the beneficiary's rate if the owner was 75 or older.

These changes affect whether it is better to spend pension money or other savings first. The answer is individual, so take advice.

Is drawdown the right way to pay for care?

Drawdown can suit people who want flexibility and have other income to fall back on. Other options include:

The main risks of drawdown are investment falls, withdrawing too quickly, and tax mistakes.

This article is general information, not financial advice. Pension Wise offers free guidance to people aged 50 or over with a defined contribution pension. For a personal recommendation, speak to a regulated financial adviser, ideally one with later-life and care fees expertise.

Frequently asked questions

Is money taken from a pension to pay for care tax-free?

Only the tax-free portion, usually up to 25%, is tax-free. The rest is taxed as income, whatever it is spent on. There is no special exemption for care spending.

Does the council ignore my pension pot?

No. In England, the council can treat an undrawn pot as producing notional income if you are over Pension Credit age, and money you withdraw counts as income or savings.

Why was so much tax taken from my first withdrawal?

Providers often apply an emergency tax code to the first flexible withdrawal. You can reclaim the overpayment from HMRC using the right form.

Can I pay the care home directly from my pension?

Usually the pension pays you and you pay the home. An immediate needs annuity can pay a care provider directly, and those payments are free of Income Tax.

Should I spend my pension or my savings first?

It depends on your tax position, the council assessment, and the April 2027 Inheritance Tax change for pensions. A regulated adviser can model the options.

Key takeaways