Buy a care annuity

You may wish to consider securing a guaranteed income to help cover your care fees through a care funding plan, also known as an Immediate Needs Annuity or a Deferred Needs Annuity.

These plans involve using a lump sum to purchase an insurance policy that provides a regular income for life. This income is specifically designed to help fund your care fees for as long as you need care.

There are two types of care annuities, depending on when you require the funding:

• Immediate Needs Annuity – for those who need care funding to begin straight away.
• Deferred Needs Annuity - for those who expect to need care funding in the future, typically within the next five years.

In the past, it was possible to buy pre-funded plans that allowed you to save in advance for care costs. However, these proved unpopular and are now largely discontinued. The main drawback was that if care was never needed, no money would be returned.

Immediate needs annuity

An Immediate Needs Annuity is an insurance policy that provides a regular, guaranteed income for life, specifically to help cover your care fees. You purchase the policy upfront with a single lump-sum payment. The cost of the annuity depends on several factors, including:

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

If your health is poor, you may pay a lower premium than someone in good health, as the insurer anticipates a shorter payment period.

Paying for care using an Immediate Needs Annuity may be suitable if you:

• have ongoing health issues
• are already receiving care at home or in a care home, or are about to start
• want the reassurance that your care fees will be covered for life
• prefer not to take financial risks

However, it may not be the right option if you:

• only need care for a short period
• want the flexibility to access your money in future
• are likely to qualify for free care through local authority support or NHS Continuing Healthcare

Advantages of an immediate needs annuity

• Guaranteed lifetime income: Immediate Needs Annuities and Deferred Needs Annuities are currently the only plans that guarantee to pay an agreed income for life to help fund care fees.
• Certainty and control: These plans provide peace of mind by reducing the uncertainty of meeting long-term care costs and ensuring you remain in control of your care funding.
• Negotiating power with care providers: Having a guaranteed, privately funded income may help you negotiate a cap on annual care provider fee increases. Care providers are often more flexible when they know fees are reliably covered, making it more likely you can remain in your chosen home long-term, provided you:

o agree annual fee increases in advance, and
o build these into your plan.

• Tax-free payments: If the annuity is paid directly to a registered care provider, the income is tax-free and does not affect your personal tax allowance.
  o In England, providers must be registered with the Care Quality Commission (CQC).
  o In Scotland, with the Care Inspectorate.
  o In Wales, with Care Inspectorate Wales.
  o In Northern Ireland, with the Regulation and Quality Improvement Authority (RQIA).
• Inflation protection: Plans can be set up to increase annually at a fixed rate or in line with inflation.
• Underwritten pricing: If you have health issues, the cost of the plan may be lower than for someone in good health.
• Optional death benefit: For an additional one-off payment, you can include protection that pays a lump sum to your estate if you pass away earlier than expected. This may be subject to inheritance tax.
• Transferable: You can transfer the policy to a different care provider if needed.
• Flexible income use: If you no longer need care or your fees reduce, you may receive the annuity as income (subject to income tax at your marginal rate).
• FSCS protection: The annuity is protected by the Financial Services Compensation Scheme (FSCS) if the provider is unable to meet its obligations.
• Inheritance tax benefit: Under current tax rules, the cost of the annuity may be deducted from your estate’s value, potentially reducing inheritance tax liability.
• Cooling-off period: You have a 30-day cancellation window after purchase.

Disadvantages of an immediate needs annuity

• Not a quick process: The plan is typically underwritten, meaning the insurer must gather detailed health information from your GP, care provider, and family.
• Large upfront cost: A significant lump sum is required to purchase the policy.
• No refund without protection: If you die shortly after taking out the plan and haven’t included death benefit protection, your estate will not be refunded.
• Irrevocable after 30 days: Once the 30-day cooling-off period has passed, the plan cannot be changed or cancelled.
• Taxable income if care ends: If you no longer need care or become eligible for NHS Continuing Healthcare, the annuity payments will be treated as taxable income and may affect entitlement to means-tested benefits.
• Inflation risk: If you haven’t built in annual increases, the annuity may not keep pace with rising care costs, requiring you to cover any shortfall from other resources.

Deferred annuity

A Deferred Needs Annuity is similar to an Immediate Needs Annuity, but the income does not begin straight away. Instead, you choose a deferral period, typically one to five years, after which the regular lifetime income starts. The longer the deferral period, the lower the cost of the plan. However, you must be able to fund your care fees yourself until the annuity begins.

Advantages of a deferred annuity

• Guaranteed lifetime income: Alongside Immediate Needs Annuities, these are the only plans that guarantee to pay an agreed income for life to help fund care fees.
• Tax-free payments: If the annuity is paid directly to a registered care provider, the income is tax-free and does not affect your personal tax allowance.

o In England: Care Quality Commission (CQC);
o In Scotland: Care Inspectorate;
o In Wales: Care Inspectorate Wales;
o In Northern Ireland: Regulation and Quality Improvement Authority (RQIA).

• Inflation protection: Plans can be set to increase annually at a fixed rate or in line with inflation.
• Underwritten pricing: If you have health conditions, the cost may be lower than for someone in good health.
• Optional death benefit: For an additional one-off payment, you may be able to include protection that pays a lump sum to your estate if you pass away earlier than expected. This may be subject to inheritance tax.
• Transferable: The policy can be transferred to another care provider if needed.
• Flexible income use: If you no longer need care or become eligible for NHS Continuing Healthcare, the annuity payments can be received as income (subject to income tax at your marginal rate).
• FSCS protection: The annuity is protected by the Financial Services Compensation Scheme (FSCS) if the provider cannot meet its obligations.
• Inheritance tax benefit: Under current tax rules, the cost of the annuity may be deducted from your estate’s value, potentially reducing inheritance tax liability.
• Cooling-off period: A 30-day cancellation window is provided after purchase.

Disadvantages of a deferred needs annuity

• Upfront cost: Although typically cheaper than an Immediate Needs Annuity, a significant lump sum is still required.
• Self-funding required during deferral: You must cover your care fees until the annuity begins. If care costs rise unexpectedly, you may risk running out of funds before the plan starts paying out.
• No refund without protection: If you die before the annuity begins and haven’t included death benefit protection, your estate will not be refunded.
• Irrevocable after 30 days: Once the 30-day cooling-off period has passed, the plan cannot be changed or cancelled.
• Taxable income if care ends: If you no longer need care or qualify for NHS Continuing Healthcare, the annuity payments will be taxed and may affect entitlement to means-tested benefits.
• Inflation risk: If you haven’t built in annual increases, the annuity may not keep pace with rising care costs, requiring you to cover any shortfall from other resources.

Find a financial adviser

If you’re paying for care yourself, you should seek advice from a qualified and experienced adviser. They can:

• help you protect your assets
• ensure your money lasts as long as needed
• assess whether a care funding plan, such as an Immediate or Deferred Needs Annuity, is right for you.