Paying for care is a complex and frightening issue for millions of elderly people and their families. Not only can it be difficult to predict the type of care and how specialist it might need to be, but for how long, and in what setting it might be required (at home, or in a specialist dementia care unit, for example).
With average UK nursing home fees costing over £47,000* a year (LaingBuisson, 2019), the cost over 4 years, for example, would be almost £200,000. The level of cost means that many people will need to make long-term financial plans for how they will fund their care. Immediate needs annuities (also called care needs annuities) are an option worth considering for people worried about their care costs – in both the immediate and long-run.
In this guide you can find out more about what immediate needs annuities are, how they work, the risks, and who is eligible for an immediate care needs annuity.
What is an Immediate Needs Annuity?
An immediate needs annuity is an insurance product that can be bought by self-funders who are set to receive long term care. In exchange for a lump sum payment to an insurance company, the buyer is guaranteed to receive regular payments for the care that they need, for the rest of their life.
By doing this, an individual can have peace of mind that there is a consistent amount of money available for their care costs every year. There is the added advantage that the money is tax-free if paid directly from the insurance company to the care provider.
Warning: Consider Options that Carry Less Risk
It is not guaranteed that your relative will make back the money that they invest in their care needs annuity. If your relative dies soon after taking out the plan, then the money that they have invested will be lost.
How Care Needs Annuities Work
There are two main types of care needs annuity, which differ in terms of when payments begin. The most common type are immediate care needs annuities, which are for people that need support with care costs immediately.
The second type are deferred care needs annuities, for people who are anticipating needing support with care costs in the near future, but don’t need financial support immediately. In most cases, the care plan starts between 1 and 5 years into the future from when the annuity is purchased.
The care needs annuity plan is not guaranteed to be able to pay for all of your relative’s care costs. There is the possibility that there will still be a shortfall between the value of the annuity payment, and the total cost that your relative will need to pay for care that year, especially if the cost of care increases. Most immediate needs annuity providers have options that can provide increasing yearly payments in line with increasing fees.
If the money is being paid directly from the insurance company to a care provider that is a Registered Care Provider, it can be paid tax-free. This differentiates an immediate needs annuity from the traditional pension annuity, as your relative would have to pay tax on the payments from the latter even if they then use the money to pay for care.
What are the Risks of Immediate Needs Annuities?
- After a one-month cooling-off period, the immediate needs annuity plan cannot be cancelled, and your relative cannot receive the money back. This is the case even if your relative stops needing care.
- If your relative dies earlier than expected then they may pay more for the annuity than they end up receiving back in payments for their care.
- In most cases, your relative will receive only up to a fixed amount, which may not cover all of their care costs. Your relative’s care costs might increase faster than the income from the immediate needs annuity plan. They therefore may end up with an increasing shortfall that they will have to fund in other ways.
Immediate Needs Annuity Providers
Though there are many providers of pension annuities, fewer insurance companies provide immediate care needs annuities. Below you can find out about the main providers of care needs annuities in the UK.
Aviva offer both Immediate Lifetime Care annuities and Secured (deferred) Lifetime Care annuities. They also allow you to choose from different options to protect your relative’s annuity payments from inflation and increasing care costs.
Legal and General
Legal and General offer a Lifetime Care plan for over 60s. They also offer a range of options to provide financial security against increasing care costs. You can get a free quote from them online based on your relative’s care costs.
Just can provide both Immediate Care Plans and Deferred Care Plans. Just have options to allow you to receive some of the lump sum back if your relative dies soon after taking out the annuity.
Immediate Care Needs Annuities FAQs
An individual is eligible for an immediate care needs annuity if they have been medically assessed as requiring immediate care (usually residential), and will continue to need care of a similar level for the rest of their life. Most providers also demand a minimum age of 60 for individuals looking to buy an immediate care needs annuity.
With a fixed-rate care needs annuity, there is a capped amount of money that the insurance company will be able to pay each year. This will not change, even if the cost of their care increases.
Some insurance providers offer an increasing-rate annuity. This means that the amount of money received each year will increase, in case the cost of care increases. However, this means that the first payment is likely to be lower than with a fixed-rate care annuity.
After the 30 day ‘cooling-off’ period your relative cannot stop or cancel their immediate care needs annuity plan, even if they stop needing care.
If your relative dies relatively soon after taking out their immediate needs annuity plan, then the lump sum that they invested in the annuity will be lost. The money is not redirected to their estate.
Yes, your relative can choose to receive the money themselves, as opposed to the money being sent directly to their care provider. However, this means that your relative will be taxed on this income, whereas the money paid directly to a registered care provider would be tax-free.
One alternative for self-funding care is NHS Continuing Care, which as the name suggests, is care paid for by the NHS. Your relative will need to be eligible with decisions resting on the primary health care needs of the individual. You should arrange for your relative to have a Care Needs assessment from the local authority as a first step. This will decide what care they need, and following a financial assessment, who will pay for the care.
Getting Independent Advice on Immediate Needs Annuities
It is important to obtain independent financial advice when making a decision about an immediate needs annuity plan, especially because they are a lifelong investment. You should encourage your relative to seek the services of an independent financial advisor, who will be able to explain the risks and advantages of a care needs annuity in their specific circumstances. A financial advisor can also help to explore other options for financing your relative’s care costs.
SOLLA (or the Society of Later Life Advisers) is a great resource to help you find a trusted, accredited advisers when it comes to matters of financial matters in later life.
The Pensions Advisory Service website is also a good resource for information and advice.