If you need a regular income now to pay for care at home or a care home, an immediate needs annuity (or immediate need care fee payment plan) could be worth looking at. The income from this type of annuity is tax free if it’s paid directly to the care provider.
What is an immediate needs annuity?
An annuity is a type of insurance policy that provides a regular income in exchange for an upfront lump sum investment.
When they’re used for long-term care, they provide a guaranteed income for life to pay for care costs.
This type of annuity can be known as an:
- immediate care plan
- immediate needs annuity
- immediate need care fee payment plan.
It’s very important to shop around for an annuity. A specialist adviser can help you avoid this.
To help find a specialist adviser, use our Retirement adviser directory
How an immediate needs annuity works
Did you know?
Typically, people use an immediate needs annuity to cover part of their care costs and fund the rest from their income and any other resources.
An immediate needs annuity is designed to cover the shortfall between your income and the cost of your care for the rest of your life.
The price of a plan is based on how much income you need and the insurance company’s assessment of how long you’re likely to need it for.
How much you pay upfront will depend on:
- your age
- current annuity rates
- the level of income you need
- whether you need an income that stays level or increases over time
- your health and life expectancy (the poorer your health or shorter your life expectancy, the cheaper the plan will be).
The income from the plan is tax free if it’s paid directly to a registered care provider.
Most care plans provide an income that increases either with inflation or a set amount each year to help you cope with future rises in care costs.
For an extra cost you can also put in a ‘capital protection’ clause. This allows your family to get some of the lump sum payment back if you were to die early.
What is a deferred needs care annuity?
This is a type of immediate needs annuity where a lump sum payment is paid at the outset, but no income is received from the annuity until after a specified waiting period, typically anything from 12 to 60 months.
Care fees due during this ‘deferred’ period will need to be paid from other resources.
The advantage of a deferred needs care annuity is that for the same level of care fees, the cost can be significantly lower than that of an immediate needs annuity but it still covers the risk of having to pay care fees for a long period of time after the chosen deferred period.
Immediate needs annuities could be suitable for you if
- you’re already in a care home, you’re about to move into one, or you’re receiving care at home
- you want the peace of mind of knowing that you have a regular income for life that can be used towards your care costs, whatever happens
- you have the money available to buy the plan.
Often people pay for the plan by taking out an equity release scheme or downsizing their home.
Immediate needs annuities might not be suitable for you if
- you don’t need to pay for care immediately
- you think you might only need care temporarily
- you might want your money back in the future
- there’s a good chance that you would be entitled to NHS Continuing Care funding. See our guide Do I qualify for NHS continuing healthcare funding?.
If you think you might need to pay care costs in the future, an alternative option is a deferred needs care annuity. This works in the same way as an immediate needs annuity except that the income doesn’t start straight away. Instead, it starts some months or even years in the future.
Risks
Once you’ve taken out an immediate needs annuity, there’s a cooling-off period (usually 30 days), giving you time to change your mind. But, after that, there’s no going back.
You won’t be able to cancel the plan and get some of the money back if, for example, you stop needing care.
You also need to weigh up having a regular, secure income to help pay for care against losing the lump sum you’ve invested if you were to die earlier than expected.
Your care costs might increase faster than the income from your plan. This means you could still have a shortfall in future that you need to meet in other ways.
Other ways to fund your long-term care
An immediate needs annuity is only one way to pay for long-term care:
Find out more in our guide Self-funding your long-term care – your options
Get advice and help
The options for funding your long-term care are complex. It’s important to always get professional advice to make sure you’re making the most of your money and not investing in a product that doesn’t meet your needs.
- Make sure you seek independent advice from a specialist care fees adviser and look at what else is available before buying an immediate needs annuity. Find out more in our guide Get financial advice on how to fund your long-term care.
- Use our Retirement Adviser Directory to find a regulated financial adviser who has the accreditation ‘Society of Later Life Advisers (SOLLA). SOLLA advisers are specialists.
This article is provided by the Money Advice Service.
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