Over the past few months, the long-term care debate has been raging on as people wait for the Government to clarify exactly what support and financial assistance it will offer those in need of care.

From 2016, the maximum someone will have to spend on long-term care will be limited to £72,000, but the cap is still a little sketchy and could possibly extend to £75,000, while those with assets worth less than £118,000 will qualify for Government help with care costs on a means-tested basis. 

This week saw annuity provider, Just Retirement, enter the long-term care market. The firm said its initial move will be in the form of an immediate needs annuity.

We take a look at what immediate needs annuities are and who they aimed at.

What is an immediate needs annuity?

Immediate needs annuities, commonly marketed as ‘care fees plans’, pay a guaranteed income for life on the payment of a one-off premium. There are currently two providers – Partnership and Friends Life, with Just Retirement set to launch its product soon.

These care plans are bought at the point that care is needed, such as when an elderly person enters a care home, so the benefit is felt ‘immediately’.

Long-term care plans are aimed at providing on-going income for the rest of your life once a need for care arises. The income they pay out can be used to provide the quality of care and support you want and need – initially in your own home, and/or in a formal care home.

The main benefit of these plans is that once purchased, they will carry on paying the insured amount for however long-term care is needed, linked to inflation, another safety net.

This is instead of you or your relatives having to guess the length of care needed and trying to manage your money accordingly.

Under HMRC rules, the income paid by an immediate needs annuity is exempt from tax if it is paid to a registered care provider for the care of the person protected by the policy.

This is in contrast to a conventional pension annuity where the income paid is guaranteed but is potentially taxable.

Why would someone need an immediate needs annuity?

These plans are designed to help fund care for those who already need it because they have become mentally impaired or are unable to carry out at least one daily activity- washing, feeding, continence, getting out of bed, dressing.

According to Just Retirement, about 175,000 residents of care homes and nursing homes are ‘self-funders’, which means they receive no State help with care fees. For these people, these care plans can offer value while safeguarding assets intended for next of kin.

Stephen Lowe, director at Just Retirement, says: “Average fees vary from £531 a week for residential care to £731 for nursing care.

“Although the average length of a stay in a care home is 2.5 years, self-funders tend to live around 4 years and more than one-in-10 will live for 8 or more years.

“The total costs of meeting care needs are unknown and ‘open ended’ so immediate needs annuities provide a way for individuals and families to insure themselves against the potentially catastrophic cost of residential care.”

These annuities can be bought with savings, often bolstered by a house sale, in a bid to safeguard other assets from being exhausted and for the protected to not have to turn to the State for their care funding needs.

Are more providers likely to enter the market?

As it stands many of today’s older people are ‘income poor, asset rich’ due to high levels of home ownership and resilient house prices.

There is also increasing pressure for people to take responsibility for their own financial affairs, including care costs, in later life.

An important factor is to encourage people to take professional advice so that they can understand the options available and make intelligent choices that balance paying their way with safeguarding their assets.

There are many good reasons to believe that this market will grow over the next decade as an ageing population seeks and needs financial solutions.
Experts predict that although there are only three providers at the moment, there is very real potential for this market to grow to perhaps six or seven times the size of today.

When should people consider these products?

Peter Wright, financial planner at Plan Money, says: “The key for anyone considering care for themselves or a relative is to seek advice early in the process to understand the full range of planning options open to them.

“All too often we see people approach us for advice when certain irreversible decisions have already been made such as selling a home.”

Those seeking advice should make sure that it is from an adviser or organisation that specialises in later life products. Make sure that they are suitably qualified in this area and can present a clear process and charging structure for their work.

Making sure you find the right people to advise you on this very important step is crucial, so do a little research before jumping in straight away.

What if I die soon after taking out the care plan policy?

Only annuities bought through Partnership offer capital protection which protects the insured person should they die within the first six months of taking out the policy.

If the insured dies within the six months period, anything between 1% and 75% is returned to their next of kin.

The amount protected decreases over time in line with the amount of income payments that are paid out. Once the total payments made equal the total amount protected, your estate / beneficiaries will not receive any benefits on your death.