Buy a care annuity

You could consider securing a guaranteed income with a care funding plan to pay for your care fees. This is also known as a ‘long-term care annuity’ or ‘immediate needs annuity’.

With these, you use a lump sum to buy an insurance policy that provides a regular lifetime income. This income is to help fund your care fees for as long as you live.

There are two options when it comes to care annuities. The main difference is whether you need:

• care funding now (immediate funding), or
• care funding in the future (deferred funding).

You used to be able to buy prefunded plans that allowed you to save for care fees. However, these proved unpopular and are now largely discontinued. The main problem with pre-funded plans was that you didn’t get any money back if you didn’t need care.

Immediate needs annuity

An immediate needs annuity is an insurance policy that pays a regular lifetime income towards your care fees. You buy the policy upfront, with a single payment. The cost depends on factors such as:

• your age
• your health, and
• the expected level of current and future care fees.

If your health isn’t good, you’re likely to pay a lower price for this product than someone in good health.

Paying for care using an immediate needs annuity may be suitable if you:

• have health issues
• are receiving care either at home or in a care home – or you’re about to start
• want reassurance that your care fees will be paid in the future, and/or
• don’t want to take any financial risks.

It’s not a good option if you:

• only need care for a short time
• might want your money back in the future, and/or
• are likely to be entitled to local authority or NHS continuing healthcare funding, which is free.

Advantages of an immediate needs annuity

• Immediate needs annuity and deferred annuity are currently the only plans that guarantee to pay an agreed lifetime income to help fund care fees.
• Having one of these plans can help you negotiate a cap on your annual care home fee increases. This is because the care home knows the fees will be privately-funded and losing you as a resident is unlikely. You should be able to stay in your chosen care home for the rest of your life if you can:
  • agree the annual fee increases with the care home, and
  • build these into your plan.
• If your plan pays out directly to the care home or home care provider, the payments will be tax-free. This means your personal tax allowance won’t be affected. To qualify the care provider must be registered with the local regulatory body. In England, your care provider must be registered with the Care Quality Commission and in Scotland with the Scottish Care Inspectorate. For Northern Ireland they should be registered with the Regulation and Quality Improvement Authority and in Wales the Care Inspectorate Wales.
• Your plan can be set up to increase each year at a fixed level, or in line with inflation.
• These plans are underwritten. If you have health issues, the cost will be lower than for someone with no health issues.
• For an extra one-off payment, you can buy built-in protection in case you pass away earlier than expected. This death benefit is paid to your estate and may be subject to inheritance tax.
• You can transfer your policy from one care provider to another, if you want to.
• If you no longer need care, or your fees reduce, you can receive part or all of the annuity as income. This income will be subject to income tax at your marginal rate.
• The annuity is protected by the Financial Services Compensation Scheme (FSCS) if the policy provider can’t meet its liabilities.
• Under current tax rules, if you buy an immediate needs annuity, its cost is deductible from your estate’s future value. This can help you manage inheritance tax liability. This means you can benefit twice if you have a large estate to pass on.
• You get a 30-day cooling off period.

Disadvantages of an immediate needs annuity

• Taking out an immediate needs annuity isn’t a quick process. This is because the plan is underwritten. This means that the insurance company has to collect information about your health from your care provider, family and GP.
• These plans require a large upfront payment.
• If you die soon after taking out the plan and haven’t taken out protection, your estate won’t be refunded.
• Once you’ve taken out the plan and you’ve gone past the 30-day cancellation period, you can’t change it.
• If you no longer need care, or become eligible for NHS continuing healthcare funding, you can receive the payments as income. These will be taxed at your marginal rate. This extra income may also affect your entitlement to means-tested benefits.
• If you haven’t allowed for care fee increases, the annuity may not cover all of your future care fees. In this scenario, you’ll need to make up any shortfalls from other resources.

Deferred annuity

A deferred annuity is similar to an immediate needs annuity but the income doesn’t start immediately. Instead you select when you want the income, either one, two, three, four or five years in the future. The longer the deferred period, the lower the cost of the plan. However, you’ll need to be able to pay your care fees until the deferred annuity income starts.

Advantages of a deferred annuity

• Deferred annuity and immediate needs annuity are the only plans that guarantee to pay an agreed lifetime income to help fund care fees.
• If your plan pays out directly to the care home or home care provider, the payments will be tax-free. This means your personal tax allowance won’t be affected. Your care provider must be registered with the local regulatory body to qualify. In England that’s the Care Quality Commission, in Scotland the Scottish Care Inspectorate, in Northern Ireland it’s the Regulation and Quality Improvement Authority and in Wales the Care Inspectorate Wales.
• Your plan can be set up to increase each year, at a fixed level or in line with inflation.
• These plans are underwritten. This means that if you have health issues the cost will be lower than for someone with no health issues.
• For an extra one-off payment, you may be able to add death protection. This can protect you in case you die sooner than expected. Death benefits are paid to the estate and may be subject to inheritance tax.
• The policy can be transferred from one care provider to another, if required.
• If you no longer need care, or become eligible for NHS continuing healthcare funding, you’ll receive the annuity payments as income. This income will be subject to income tax at your marginal rate.
• The annuity is protected by the Financial Services Compensation Scheme (FSCS) if the policy provider can’t meet its liabilities.
• Under current tax rules, if you buy a deferred annuity, its cost is deductible from your estate’s future value. This can help manage inheritance-tax liability. This means you can benefit twice if you have a large estate to pass on.
• You get a 30-day cooling off period.

Disadvantages of a deferred annuity

• Though cheaper than an immediate needs annuity, these plans still require an upfront payment.
• You’ll need to pay your care fees yourself until the plan becomes available to use. Be sure that you have the funds available to do so and be aware of any increase in costs. An increase in costs could mean you run out of money before the deferred annuity comes into effect.
• If you haven’t taken out protection against an early death, your estate won’t receive any refund.
• Once you’ve taken out the plan and the 30-day cancellation period has passed, it can’t be changed.
• If you no longer need care, or become eligible for NHS continuing healthcare funding, you’ll receive the annuity payments as income. This income will be taxed at your marginal rate and may also affect your entitlement to means-tested benefits.
• If you haven’t allowed for care fee increases, the annuity may not cover all of your future care fees. This means you’ll have to make up this shortfall from other resources.

Find a financial adviser

If you’re paying for care yourself, you should get specialist care fees advice from a qualified and experienced adviser. They’ll be able to:

• discuss the best ways to protect your assets
• look at how to ensure that your money lasts for as long as is needed, and
• let you know whether a care funding plan (immediate needs annuity or a deferred annuity) could be right for you.