Immediate care annuity
When it comes to funding later life care, one of our greatest challenges is our uncertainty about life expectancy. It is difficult to predict what health issues we will experience and both care homes and visiting care can be more expensive than we would imagine.
Ultimately, we cannot be sure that our estimates are accurate. It is possible that we will run out of money, leaving us or our families without the care that we need.
A care home annuity can help put your mind at ease, providing you with a guaranteed income to cover any care costs. An annuity for care home fees is a product for reducing risk in your portfolio, helping you finance your care plans and care home fees.
Topics you will find in this article
1—What is an immediate needs annuity?
An immediate needs annuity, known also as an immediate care annuity, is a contract between an insurance company (or care provider) and a person who would like a regular income that is paid directly to cover their care fees.
A person purchases an annuity for a lump sum, with the amount often taken from a pension, and the provider (usually an insurer) pays out according to the terms of the contract. They are often considered to be a kind of investment or insurance.
Once you have turned sixty, you are eligible for an immediate care annuity. It applies whether you become a resident of a registered care home or are receiving care from a non-registered care provider in your own house.
2—What is the difference between an immediate care annuity and a pension plan?
In the case of a workplace pension (not a state pension), a company puts money into an account on behalf of an employee over the course of their career. Upon retirement, they pay that money back in regular instalments to that individual, which are usually guaranteed for the rest of their lifetime.
If the individual is married and passes away early, their spouse will continue to receive the entire regular sum or a portion of it, depending on what their elections are.
Single premium immediate annuities work in more or less the same way but, unlike a pension plan, you actually contribute the money yourself. In this case, you will deposit money to an insurance company or a registered care provider and in return they will provide you with a regular stream of income.
3—What are some common annuity conditions and content that a client should be aware of?
When depositing the money for a single premium immediate annuity, you have a few choices about which parties it will implicate and the date of expiry:
- Joint option: In this case, once the account holder dies, the annuity usually pays out until their beneficiary (i.e. their spouse or partner) dies.
- Fixed-term: For fixed annuities, regardless of how long you and your spouse live, the insurance provider only makes payments for a minimum period of time e.g. a ten year period.
- Return of Premium rider: Whatever your lifespan, the insurance company will pay your heirs at least as much as you invested. Even if you die early, your kids will be guaranteed the return of the original lump sum payment.
As you might expect, each of these options may potentially reduce the income percentage or level that you receive from the insurance company.
4— What is a deferred income annuity and what are its advantages?
A deferred income annuity is like an immediate care annuity but you only receive the funds after a set period of time. The longer the deferral period, the lower the cost of the plan.
For example, you might set up the annuity after identifying a financial shortfall at age 60, but receive your first payment at 70, when you are perhaps closer to needing care.
One of the major disadvantages of an annuity is that all control of the money is given over to the insurance provider. Individuals can’t change their mind and have no consent to do anything with the money over that period.
An exception to this is if you have elected the return of premium before the start date feature on a deferred income annuity. If you have deposited the money with the insurer and change your mind during any time in the deferral period, you can take your original premium back out. But you will not get any interest or any credits back. It may come at a cost depending on the annuity.
5—Under what circumstances is an immediate care plan not a suitable option?
- If you are too old— Most annuities cannot be issued much past the age of 80. At this point, a user’s need for the annuity is significantly diminished. Considering the average life expectancy, most advisors would question the necessity of an immediate need care fee annuity (income guarantee).
- If you have liquidity issues—A long-term care annuity is, as its name would suggest, a long-term investment vehicle. Most are meant to be lifetime investments and have some penalties for taking out your money early: an annuity is intended to be a safer part of your retirement portfolio.
- If you simply don’t need the income —If you own assets such as pensions, have access to state benefits (e.g. attendance allowance) and use the NHS rather than a private healthcare service, your experience may not warrant the support of annuity.
6—Why might a long term care annuity be a good choice?
Here are the common reasons why clients might choose an annuity as part of their care funding plan:
- Avoid Shortfalls
When mapping out your retirement expenses, it is important to identify any gaps. This is the primary benefit of an annuity: it can generate an income stream that will cover the anticipated care costs for your situation and is guaranteed over a specified period of time.
- A Sure Payout
You want the peace of mind and the security that comes from knowing that you will receive a regular income for life that can be used towards your care costs, whatever your circumstances. You are a customer that wants reassurance that your family will not need to pay for your nursing home or other care providers.
- Principal Protection
While not every annuity has this feature, many of them have the ability to protect customers from losses in the market. So if you’re concerned about fluctuations with stocks or bonds within a part of your portfolio, certain insurers have the ability to offer protection from that.
- Legacy Feature
If you’ve determined that a certain proportion of your investments will be passed down to your children or grandchildren, certain types of annuity have the ability to add on what’s usually known as a rider (could be a death benefit), which gives your heirs a guarantee.
7— What are the limitations and drawbacks of an annuity?
- Once you’ve purchased an immediate needs annuity, any cancellation of the plan will result in a loss of funds.
- If the you require much more care in the future than originally predicted, the payments you receive from the annuity may not be enough to cover all your bills.
- You may need care for a shorter duration than anticipated and so you could lose some of the money you invested, especially if you never end up needing it.
- Your entitlement to some means-tested state benefits may be affected by any payments from your immediate care annuity plan.
8—How much does an immediate annuity pay?
The annuity payment that you receive will depend on how much you need and the price of buying that guaranteed income. Annuity providers need to know details about the person requiring the insurance and the lump sum they have.
In turn, the insurer will consider how old the individual is and their health before informing you about how much they will give in you in exchange for the lump sum. This process can also be reversed: you can specify how much you need, and they will calculate the lump sum you will need to provide.
Care fee annuity quotes will vary according to the riders and conditions you opt for. You can use an online annuity calculator to get an idea of the figures you are entitled to: https://ukcareguide.co.uk/immediate-care-annuity/
People should be aware that the immediate needs annuity quote provided by such a device is often based on insufficient information. The figures provided can be inaccurate.
It is very important to find a specialist adviser who can help you compare the different annuity rates and levels that are available. They can then help you choose the best option.
9—What information is used to calculate the annuity?
Each annuity is underwritten for someone’s personal needs using information and factors provided by their GP. This means that it is not necessary for applicants to undergo a medical exam.
If your health issues are more serious, it is likely that the round figure you put down will increase. This is to ensure an adequate rate of payment.
10—Will I need an advisor to help me get an annuity?
It is often important to make use of the services of a specialist when you are considering pursuing a care annuity. This is because they are quite complex and the few insurers that do offer them only deal with professional advisors.
You can be sure that most financial advisers are experts on concepts relating to equity and capital. You need to find one that covers the areas around a care or life annuity.
11—What is the benefit of paying an immediate needs annuity directly to the care provider?
If annuity payments are made directly to the care provider, the income from this type of annuity is tax free. This leaves you with a higher number of savings to actually go towards your care costs/nursing care contribution.
But the rules governing tax could change in the future and might impact the value of the cash payment you receive.
12—How do immediate needs annuities affect inheritance tax?
As well as cutting the cost of care in later life, immediate needs products can help with inheritance tax planning. By purchasing an annuity, someone can reduce the size of their estate, removing the IHT liability and further reducing the cost of their lifelong care.
So the product may be a means of addressing more than one problem: protecting you against unforeseen events and helping you to maximise your existing resources.
13— What should I do now?
While this article has hopefully helped to address some of your worries, it should only be considered a rough guidance or explanation. You are under no obligation to buy the mentioned items or follow through with its tax advice.
You should talk to a registered care provider and/or a financial adviser for some more in-depth advice about a potential annuity contract. They will help you get a better sense of who are long term care annuity providers and the details of each policy.
An expert will provide you with some useful links for your scenario and help you make a final decision through a navigation of:
- the best ways to protect your assets: sorting what looks good from what is good
- your rights and entitlements
- methods for ensuring that your money covers your care plan (e.g. an option that adjusts with inflation )
- whether an immediate needs or deferred care insurance would be most appropriate for you
- whether you should pay your care provider directly
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