Getting to grips with immediate needs annuities

The level of premium depends on things such as a person’s age, health and choice of care home.

The minimum age for an immediate needs annuity is usually 60-years-old, says Brian Fisher, long term care marketing manager of Friends Life.

Each case is individually underwritten using medical information gleaned from a GP report and, if the applicant is already in a care home, a care manager’s report. Mr Fisher says applicants do not have to have a medical examination.

The benefits are paid free of tax providing they are paid directly to a registered care provider – that is a care home or home care agency that is registered with the Care Quality Commission or its Welsh, Scottish or Northern Irish equivalent.

They regulate care homes and home care agencies, as well as other medical establishments, to ensure they meet current care standards.

The benefits can be paid directly to the policyholder if required, for instance if you were receiving care at home provided by non-registered carers, but Mr Fisher says the benefits would be taxed in the same way as a purchased life annuity.

When setting up the plan, he says you can choose to have the benefits increase each year at a rate from a range offered by the product provider, usually related to the retail price index level of inflation or a whole percentage rate.

You can also usually choose the month in which the benefit increases to fit with the month in which the care provider increases their fees, he adds.

Various options are available but Mr Fisher says it is usually a form of decreasing term assurance that covers up to 75 per cent of the total premium payable.

On the reasons to opt for an immediate needs annuity, Andrew Dixson-Smith, care fees adviser and director of Eldercare Solutions, says: “The guaranteed payment for life, paid tax free, results in a reduction in the value of the estate that could potentially save inheritance tax due on death.

“They provide peace of mind as the income will always be paid until death and portability if there is a change of care providers.

“Deferred options are available that defer income payments for a cheaper plan cost and the plans are protected by the Financial Services Compensation Scheme.”

On the downside of this product, Mr Dixson-Smith says payments are not guaranteed to cover the cost of care, which will depend on factors such as ongoing health and inflation in the cost of care provision.

If the care costs exceed the income provided by the plan then the person is responsible for the difference, he notes. Also, the purchase of one of these plans is not something that can be reversed - again, like a typical annuity.

These plans, including capital protection, have no cash value at any time and cannot be cancelled.

Income payments from the plan may affect entitlement to some means-tested state benefits, Mr Dixson-Smith adds.

According to Frances Ross, product manager at Partnership, there are variations on the theme of immediate needs annuities, which include:

1) In return for the set premium, a deferred needs annuity undertakes to pay a regular income towards a person’s care costs for the remainder of their lives, after a set period (for example two years) has elapsed.

2) Immediate needs care annuities can increase if it is linked to RPI or designed to increase by a set percentage each year. This option is more expensive but Ms Ross says it provides people with additional peace of mind as it lessens the amount they personally may have to pay in the future.

3) Care plan payment option secures a loan against the value of someone’s home, which is then used to purchase a care annuity. Ms Ross says this helps someone who is asset rich but cash poor and unable/unwilling to sell their home.

4) Capital protection allows a person to protect up to 75 per cent of their premium until the percentage has been paid out in total, either to the care home or the estate.

Capital protection options reduce risk in the event of early death, Mr Dixson-Smith points out.

Stephen Lowe, group external affairs and customer insight director of Just Retirement, says the advantage of a care funding plan is peace of mind.

Mr Lowe says: “Entering a residential home can be a stressful time for the family and the financial impact can be huge.

“A care plan guarantees income will flow for as long as required, helping to protect other assets that might otherwise have to be sold if the care fees need to be paid for a long period.”