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Immediate Needs Care Annuities: what you need to know

Written by: Frazer Wilson
Going into care is often a worrying and stressful time for all involved. There's the emotional stress for the individual and their family; the practicalities of the move; and last but not least, the financing of the move.

When it comes to paying for care, either at home or in a residential/nursing care environment, there is often a shortfall between an individual’s income (from pensions, investments, local authority assistance, rent from a second property etc) and the cost of care. Recent findings show that approximately one in four people paying for their own care still need to fall back on state support, which can be difficult for everyone involved.

There are a number of options that can be considered, but one that is often overlooked is covering part or all of a shortfall with an Immediate Needs Care Annuity.

Fundamentally, in return for a one-off payment, you receive an agreed level of income to pay care fees for the rest of your life. The cost will depend on several factors such as an individual’s age, health and ability to undertake certain activities of daily living. It can be reduced by deferring the payment of the annuity if you are able to pay the care fees in the interim.

These arrangements are pretty simple and can be tax efficient as the one-off payment to buy the annuity is paid out of the estate, so this may reduce any inheritance tax (IHT) liability. Additionally, the income from the annuity is paid free of tax if it is paid directly to a care home or registered care provider. However, as mentioned, this option is often overlooked – in fact, according to Just, an insurance company, only 7% of people who need care request a quotation of this sort.

Of course, the main risks are that these plans can’t be cancelled, loved ones may not get all or part of the lump sum paid for the Immediate Needs Care Annuity, or the payments fail to cover any increase in care costs (care fees inflation or increasing care needs). These risks may be covered to a degree, as some companies will include a capital protection and inflation option, if desired, but these will increase the cost at outset.

Below is an illustration for a recent client:

  • Shortfall (gap between income and care costs) = £35,000 per year
  • Cost to cover this shortfall = £150,000.

In this example, the client needs to live for just over four years to effectively get their money back. The payment may also reduce any IHT liability but this will vary according to an individual’s circumstances.

In most cases, an individual would need to be over 60 years old to apply for an Immediate Needs Care Annuity. These can be applied for by either the individual or attorney, if capacity has been lost.

The annuity provides certainty which also means that the remainder of the estate is less likely to be needed to meet future needs. This can provide greater transparency and certainty for those looking to pass their wealth to family knowing that the remainder is unlikely to be used for funding. Even if you finally decide the above option is not for you, it costs nothing to obtain a quote and we feel it really is an opportunity that needs to be considered. It may not be obvious at the time, but having a plan in place can save a lot of time, effort and stress later down the line.

It is helpful to speak to someone who has experience in dealing in later life planning. A good starting point would be an accredited member of The Society of Later Life Advisers (SOLLA). SOLLA requires members to demonstrate added expertise in respect of later life planning.

They will review all of the options based on the individual’s age, health and circumstances. Looking at what you have now and what you might have in the future and then comparing this to the anticipated cost of care home fees is a good indication of whether any financial shortfall might occur. Plans can be made now and if care is needed the finances are, at the very least, known about and, at best, taken care of.

Frazer Wilson is senior consultant at Thomas Miller Investment

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