Guide: setting up a care fees annuity

Paying for care is a complex and often intimidating issue for many elderly people and their families. It can be difficult to predict the type of care and in what setting it might be required.

With average UK nursing home fees costing over £47,000* a year (LaingBuisson, 2019), the cost over 4 years, at this level, would be almost £200,000. The size of the cost means that many people will need to make long-term financial plans for how they will fund their care.

Immediate needs annuities (AKA long term care 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.

It is not guaranteed that they will make back the money that they invest in their annuity. If your relative dies soon after taking out the plan, then the money that they have invested may 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 the care costs. There is the possibility that there will still be a shortfall between the value of the annuity payment, and the total cost 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 you 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 the annuitant cannot receive the money back. This is the case even if they stop needing care.

If an individual in care 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, they will receive only up to a fixed amount, which may not cover all of their care costs. The 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.

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 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 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 financial matters in later life.

If you need advice on care funding, please get in touch and we will be happy to assist.

Barra Gorman

Chartered Financial Planner

SOLLA Accredited Adviser