Using an immediate needs annuity to pay for care

If you have to fund care home fees yourself, taking out an immediate needs annuity can help you to cover all the costs involved. An annuity works as a payment plan. It gives you a guaranteed income in exchange for a lump sum investment, which you can use to pay for parts of your care costs.

Using an immediate needs annuity for care home fees can provide you with peace of mind, knowing that if you live in a care home long-term, your fees will be covered for the rest of your life.

What is an immediate needs annuity?

An immediate needs annuity is sometimes referred to as an immediate care annuity, care home annuity, care fees annuity or care fee payment plan.

It is a form of insurance policy purchased from a third party which ensures that you receive a regular income for the rest of your life by converting your savings into an annual pension.

You can use this income to pay for long-term care, such as paying for a residential or nursing home place.

One benefit is that the income from an annuity is tax-free as long as it is paid directly to your registered care provider.

You have to pay an upfront lump sum in return for the monthly payments. However, the price of taking out an immediate needs annuity varies and is based on the following:

• Your age
• Your overall health and life expectancy
• The current annuity rates
• How much income you need

If your current income is not enough to cover all the costs, using an immediate needs annuity for care home fees enables you to use some of your assets to bridge the gap.

Who is eligible for an immediate care annuity?

Anyone over the age of 60 can take out an immediate care annuity if they have to be cared for in a residential setting or at home.

Advantages and disadvantages

There are both benefits and disadvantages of taking out a care fees annuity. It may be a good idea to consult an independent financial adviser before you commit to an insurance company.

If you do not need to pay for care immediately, or you think that you may only need to move into a care home temporarily, the annuity is not for you.

This is because if you stop needing care and want to cancel the plan, you will not be able to get your money back. Also consider that you may be eligible for NHS Continuing Healthcare in the future, which means that the NHS will arrange and cover your care.

Advantages

• If the money is paid directly to the provider, it will not be counted as income which means it is not subject to income tax.
• It can give you peace of mind knowing that at least some of your care home costs are guaranteed to be covered.
• The income will usually increase at a set amount each year to combat inflation.
• You can purchase a guarantee known as capital protection which ensures your family receives a portion of the lump sum back if you die early.

Disadvantages

• The price of the immediate needs annuity may consume a substantial amount of your current capital.
• Although the income may increase to help match inflation, it may not keep the pace of the rise in actual care costs.
• Unless you pay extra for capital protection, your family will lose the lump sum if you die early.
• You cannot cancel it once you have made the purchase apart from within the cooling off period.

As there are risks involved with taking out an immediate needs annuity, always seek independent advice which fully considers your circumstances.

How buying an immediate needs annuity works

You buy an immediate needs annuity through an insurance company. Once the terms are agreed, you give them a lump sum upfront.

In return, they will give you a monthly payment (or pay directly to your care home) for the remainder of your life. As mentioned earlier, this amount is tax-free if it made directly to your provider.

How much you receive depends on a number of factors, such as your age and how much you have paid towards the annuity.