If you or a loved one needs to pay for long-term care, then an immediate needs annuity could be worth looking into.

You might have heard of a pension annuity, which is essentially a contract with an insurance company. In return for handing over some, or all your pension savings, you’ll be paid a guaranteed income for life, or a fixed term.

An immediate needs annuity works in a similar way, except they are specifically designed to pay for long term care. In this article, we go through all of the ins and outs of immediate needs annuities – also known as immediate care plans – so you can decide whether they might be the right choice for you.

How does an immediate needs annuity work?

Immediate needs annuities provide funds for people who will likely 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 often 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 indicates 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.

An immediate needs annuity can ensure that you 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 you paid in the original premium.

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.

Do I need an immediate needs annuity?

You might want to consider an immediate needs annuity if you are in care, or expect to be very soon, and want 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 is an immediate needs annuity?

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 much will I be taxed on my immediate needs annuity?

Another huge advantage of immediate needs annuities is that payments are not considered part of your income, as they are paid directly to the care provider. Therefore, unlike with other annuities, income from an immediate needs annuity is tax-free.

What are the downsides 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 will be locked into your plan.

This means that you can’t cancel if you change your mind and want your lump sum back, or if you unexpectedly stop needing care.

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, 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 in the plan.

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

How do I find a good immediate needs annuity plan?

As with any type of annuity or lifetime plan, it’s really important to shop around and look for the best rates – picking the wrong plan could see you 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. Getting 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 guides on How to find the right financial advisor for you or How to get advice on your pension.

If you think you might be interested in speaking with a financial advisor, VouchedFor is currently offering Rest Less members a Free Financial Health Check with a local well-rated financial advisor. There’s no obligation, but once you’ve had your check, the advisor will discuss the potential for an ongoing paid relationship if you think it might be useful to you.

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

Do you know anything about paying for care? Did you use an immediate needs annuity? If so, we’d be interested in hearing from you. You can join the money conversation on the Rest Less community or leave a comment below.

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