Immediate Needs Annuity

How Much Does Long-Term Care Cost in the UK?

The cost of care homes in the UK depends on where in the country you’re located, but for residential care average costs are £32,344 per year. This increases considerably if you need nursing care — the average yearly fees nursing homes charge in the UK stand at £44,512. This is equivalent to around £622 per week for residential care and £856 a week for nursing care.¹

Obviously this is an enormous expense and even people with sizeable savings and a home to sell to fund their care may run out of cash depending on how long they need care for.

What’s more, once your savings are used up, you could face having to move care homes, perhaps to a cheaper or state-run facility, at a time where you’re older and potentially ill and more vulnerable.

While the state will kick in to pay for your long-term care once your own capital is depleted, your current home may not accept state-funded residents. Alternatively, state funding may not be sufficient to meet the costs your current home charges and you may not be able to bridge the shortfall.

1 http://www.payingforcare.org/care-home-fees

If you have enough in capital to pay for care, you may wonder why you’d buy an immediate needs annuity instead. The main reason is that immediate needs annuities don’t run out, which is a risk with your savings.

A care fees annuity will continue paying an income until you pass away, which could be long after you would have exhausted your savings.

John Spink
Head of Financial Planning at Drewberry

How Do You Pay Care Home Fees?

To put it simply, if you have ‘too much’ money in the government’s eyes in the form of savings, property and other wealth you’re expected to use those funds to pay for care yourself entirely.

The threshold varies across the UK as care is a devolved issue, but in 2019/20 you’ll be expected to fund care entirely yourself if you have more than:

• £23,250 in England
• £23,250 in Northern Ireland
• £28,000 in Scotland
• £50,000 in Wales.

This means that if your total assets are more than the amounts stated above, you won’t be able to receive any state funding and you’ll have to pay the entire cost yourself.

Care Home Fees in England and Northern Ireland

In England and Northern Ireland, if your assets are less than £14,250 then you won’t have to contribute to care costs from your capital, but you will have to contribute from your income. Any income contributions shouldn’t take your income below the level of the weekly Personal Expenses Allowance, which is a minimum of £24.90 in England and £26.33 in Northern Ireland.

If your assets are between £14,250 and £23,250, you’ll have to contribute £1 in every £250 of your assets, plus all your income (e.g. from pensions, benefits etc.).

Care Home Fees in Scotland

In Scotland the system is the same as in England and Northern Ireland, although the thresholds are different, at £17,500 at the lower end and at £28,000 at the upper end.

However, Scottish people assessed as needing care in their home typically get funding from their local council. You can claim personal care payments and possibly also nursing care payments to contribute towards the cost of your care. For 2019/20, you can claim back expenses for in-home care from your local authority of:

• £177 per week for personal care
• £80 per week for nursing care
• £257 per week for personal and nursing care.

Care Home Fees in Wales

In Wales there is only one limit – £50,000. If you have assets above this you’ll have to meet the full cost of long-term care yourself.

If your assets are below this, you won’t have to contribute from your capital but you will have to put the majority of your income towards paying the care home fees, except for a personal expenses allowance of £29.50 per week.

As you can see, you don’t have to be mega-wealthy for your local authority to expect you to pay for some or all of your care. You could easily exhaust most of your capital before you get any state funding at all. That’s where an immediate needs annuity can help, especially if you want to preserve assets, such as your home, to pass down to your children.

Jonathan Cooper
Senior Paraplanner at Drewberry

How Do Immediate Needs Annuities Work?

Essentially, an immediate needs annuity is there to bridge the gap between your income and the cost of long-term care. The insurance company will underwrite each annuity individually based on how long you’re likely to need an income for.

This may be based on evidence from a GP report and, if the proposed annuitant is already receiving care, a care manager’s report. The outcome of the assessment must be that you’re in need of long-term care.

It’s rare for an immediate care needs annuity applicant to have to undergo a medical; usually GP and care manager evidence suffices.

When deciding on your immediate needs annuity rate, insurers will typically take into account:

• Your age
  The older you are, better the annuity rate
• Your medical history / current medical problems
  Someone in poor health is likely to get a better annuity rate
• How long you’re expected to live
  The lower an insurer thinks your life expectancy is, the cheaper the annuity will be
• Current annuity rates
  Determined by current economic and market conditions, these fluctuate with time.

If you pass away before the annuity company expects, i.e. before you received all of your initial investment back as care home fees, then your family won’t receive anything back. However, it’s possible to protect the capital you invest (see below).

If you die later than expected, i.e. after the point your savings would have been exhausted, you’ll still be getting an income to cover your care costs until you die.

Some providers will allow another person, perhaps your children, to buy an immediate needs annuity on your behalf. This could be because you don’t have the funds to do so yourself.

When someone else purchases an immediate needs annuity for you, it works in exactly the same way and is still based on your life. The only difference is that someone else pays in the initial capital.

Types of Annuity

While immediate needs annuities are one type of annuity, there are several different options to consider when purchasing one.

Capital Protected Annuity

You have the option to protect the capital investment of your annuity. Also known as a value protected annuity, this option sees you receiving a lower annuity income in exchange for your family receiving a proportion of the unused funds from the annuity when you die.

The danger of this is that you might not be able to afford care home costs with a lower annuity just to secure a payout for your family after your death.

Escalating Annuities

To protect against future rises in long-term care fees, you can opt for an escalating annuity that rises by a set percentage each year. Typically, you can secure increases of between 1% and 8% each year, depending on your needs and circumstances. You can also opt to link the cost to inflation.

What is a Deferred Annuity?

If you’re worried that you might need care in the future, you can purchase a deferred annuity, where the annuity will only kick in after a set period.

You may use this if you initially have enough capital to meet the care home fees but are aware it will run out, or if you think you might need care at some future date. The longer you defer your annuity for, the higher the eventual payment will be.

Sometimes people opt for a deferred annuity because they want to take advantage of the pension freedoms early on in their retirement but want to ensure they’ve got a steady income in the future as they age and may need care.

Deferred Care Home Payment Plan

If you own a property, instead of buying an annuity one option to pay for long-term care is a deferred care home payment plan. This sees the council paying for your care home fees. You then defer repaying the council until either after your death, at which point your home is sold to cover the debt, or until you choose to sell your home during your life.

You can typically run up a debt of up to 90% of your home’s value with such plans. The risk is that you may outlive the equity in your home.

Benefits of Immediate Needs Annuities

• Your money won’t ever run out, meaning you can keep paying for care for however long you need it
• You may be able to keep assets, such as your home, safe from liquidation to fund long-term care by paying for an immediate care fees payment plan from savings
• Income from an immediate care needs annuity is typically tax-free, providing it’s paid to a registered care provider
• There’s no investment risk — no matter how the markets perform, your care home fees are guaranteed and your annuity is 100% protected by the Financial Services Compensation Scheme
• No longevity risk — you will never outlive your immediate needs annuity, whereas you might outlive your savings
• Care home fee increases can be built into the plan
• Paying for an immediate care payment plan upfront reduces the total value of a person’s estate straight away at the point of purchase, potentially mitigating inheritance tax liability.

However, while there are a number of benefits to immediate needs annuities, it’s not necessarily the right choice for everyone. If you’re keen for investment growth on the funds you put towards such an annuity, for example, then this option won’t work for you.

These plans have no cash value and cannot be cancelled, so there’s no flexibility to change your mind. This could be problematic if you only need short-term care to get yourself back on your feet after an illness.

Ultimately, whether an immediate needs annuity is right for you will depend on your circumstances and is something best discussed with an expert adviser.

Expert Advice on Immediate Needs Annuities

Immediate needs annuities can be complicated. You’ll first have to be assessed as being immediately in need of long-term care, which will be done by examining your GP records and / or taking into account a care manager’s report.

Then you’ll need to decide how much income you require from the annuity and whether it will need to escalate in the future to take into account rising care home costs. It’s important to assess your life expectancy — paying a large sum upfront to secure a lifelong annuity may not be worth it if you’re not likely to be in care for very long and could pay fees with savings alone in the short-term.

An immediate needs annuity can be one solution to funding the cost of long-term care but it’s far from the only option. It’s important to engage in proper financial planning if you or a loved one needs to go into long-term care.