An immediate needs annuity can help you fund the cost of long term care by paying a guaranteed income in return for handing over some, or all your pension savings.

If you or a loved one needs to pay for long-term care, an immediate needs annuity could be an option to consider, but it’s important to understand their features and their pros and cons so you can decide whether they’re right for you or your loved ones.

Here we outline everything you need to know about immediate needs annuities.

What is an immediate needs annuity?

You might have heard of a pension annuity, and an immediate needs annuity – also known as immediate care plans – works in a similar way, except they are specifically designed to fund long-term care.

With an immediate needs annuity, you’ll essentially enter into a contract with an insurance company, where in return for handing over some, or all your pension savings, you’ll be paid a guaranteed income for life to pay for long-term care costs.

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How does an immediate needs annuity work?

An immediate needs annuity is designed to fund long-term care and is useful for people who are likely to be in care for the rest of their lives, either at their own home or in a care home. The income from the annuity is used to cover the cost of care home fees, or employing a carer at home, both of which can be very expensive.

Many people who go into care are uncertain how long they will be there for, so it can be difficult to budget for, and could end up being very costly if it turns out to be longer than you expect. A study from BUPA showed that one in ten people admitted to a nursing home will still be alive after six years. With average care home costs at about £44,000 a year, this means that six years in a care home would cost £264,000, and this doesn’t even factor in that rates are likely to increase at least by the rate of inflation each year.

An immediate needs annuity can ensure that the care home will receive a consistent monthly income to cover care bills. Most plans will be designed to increase with inflation or by a regular amount in order to keep up with rising care costs. This can provide greater peace of mind than paying from your own funds or savings, because as long as you are alive, your provider will always make your annuity payments – it won’t run out.

If you live long enough then you may well end up benefiting from this purchase, as you may end up receiving more in care payments than the lump sum you handed over.

An immediate needs annuity can also be convenient because you do not have to handle making payments yourself. Income from an immediate needs annuity is paid directly from the annuity provider to the care provider, so you won’t have to worry about making the payments each month.

What happens to my immediate needs annuity if I change care providers?

Plans tend to be quite flexible in terms of who receives the payment, so if you decide to change care providers, the insurer providing your immediate needs annuity can simply arrange to send payments to the new care home or carer.

Is an immediate needs annuity right for me?

An immediate needs annuity won’t be right for everyone but if you or your loved one is in care, or expects to be very soon, it can give you the confidence that the costs of caring are all squared away.

This doesn’t just mean care in a nursing home – if you have a carer who comes around to your house then an immediate needs annuity can cover this expense too, even if they only come a few times per month.

How much does an immediate needs annuity cost?

The cost of an immediate needs annuity will depend on your circumstances. The company will look at how much you need and how long they expect you to need it for. Ultimately, your upfront payment will depend on:

  • Your age
  • The state of your health and your life expectancy
  • Current annuity rates
  • The income you’ll need, and whether this will stay the same or increase over time

In some cases you can pay extra to ensure that your family would receive your lump sum back if you were to die much earlier than anticipated. This is called a capital protection clause.

How do immediate needs annuities affect taxes?

A major advantage of immediate needs annuities is that unlike other types of annuity, income from an immediate needs annuity is tax-free.

This is because payments made by your immediate needs annuity insurer are not considered part of your income, as they are paid directly to the care provider.

Find the UK's best care options with Lottie

Not sure where to start looking for care for your loved ones? Find the UK’s best care options, handpicked and vetted by experts on Lottie. They’ll guide you through every step of finding the right care.

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What are the benefits and drawbacks of immediate needs annuities?

There are, of course, advantages and disadvantages to immediate needs annuities:

Benefits of an immediate needs annuity

The main benefit of an immediate needs annuity is the reassurance that you or your loved ones care needs will be funded for as long as you need.

On top of this, the money from the immediate needs annuity is paid directly to your care provider, so isn’t taxed like other annuities as it’s not viewed as part of your income.

Most plans are also designed to increase with inflation or by a regular amount in order to keep up with rising care costs.

Drawbacks of an immediate needs annuity

As with any kind of annuity, an immediate needs annuity is a big commitment. After a brief cooldown period (usually 30 days) during which you can opt to back out, you’ll be locked into your plan. This means that you can’t cancel if you change your mind and want your lump sum back.

An immediate needs annuity can also be a bit of a gamble if you don’t know how long you’ll be in care for. It can be very good value if you end up staying for a long time – however, if you die after only a few years, or you unexpectedly stop needing care, you may make back far less in care payments than you spent on the plan in the first place, and end up losing a big part of your estate for nothing. This is a major reason to consider paying extra for a capital protection clause, which will refund your lump sum to your family if you die very early on after buying the plan.

Finally, you should be aware that being on an immediate needs annuity might make you ineligible for certain means-tested state benefits, depending on how high the payments are.

Who offers immediate needs annuities in the UK?

Immediate needs annuities are a specialist insurance policy, so they are only offered by a few UK insurers, including:

How do I find a good immediate needs annuity plan?

As with any type of annuity, it’s really important to shop around and seek out the best rates – picking the wrong plan could see you effectively throwing away thousands of pounds. If you aren’t sure which annuity to go for, or whether an annuity product is right for you, seek professional financial advice on your specific circumstances. Buying an annuity is a huge financial commitment, so having an expert’s point of view can be very valuable.

You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guide on How to find the right financial advisor for you.

For more information on different types of annuities, check out our guide Annuities Explained.

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