If you want to make sure all your care costs are covered, you may be thinking about a care annuity.
This insurance policy means you’ll receive regular payments to go towards the cost of your care in later life.
Then you won't have to miss out on the care you want due to lack of funds.
This article will cover everything you need to know about the care annuity and how it can help you pay for care.
Disclosure: You should not use this article to make financial decisions. We highly recommend you seek professional advice from someone who is authorised to provide financial guidance.
Here’s a summary of what we’ll cover:
- A care annuity is a type of insurance policy to help you pay for extra care costs.
- You pay a lump sum and in return get regular payouts to go towards fulfilling your later life care plan.
- It’s one way of financial planning for later life that won’t put your family under pressure to pay for your care.
- It may not be a suitable option for everyone and needs careful consideration with a financial adviser.
What is a care needs annuity?
A ‘care needs annuity’ is an insurance policy that helps you pay for any gaps in your care payment plan.
It does this by providing you with regular payments in exchange for an upfront investment of a lump sum.
Therefore giving you a set income that goes towards care costs, either for care at home or in a care home.
Depending on when you need to access the money, you can purchase an immediate needs or a deferred needs annuity.
What’s the difference between an immediate needs and deferred needs annuity?
An immediate needs care annuity is for people who are already receiving care and need financial support sooner.
This means that you will start receiving payments within around a month of purchase, and they must begin within a year.
A deferred needs care annuity means that you purchase the policy, but don’t start receiving money until after a certain time.
This could be after a year or even some years in the future.
How does a care annuity work?
To have a care annuity, you must pay a lump sum to a care annuity insurance provider.
This is then paid out as regular income either to the care provider or policy holder.
It is a good way to plan for long-term care costs so you don’t have to worry about how you’ll pay for care in the future.
And it avoids confusion over questions such as are next of kin responsible for care home fees?
Confused about care funding?
How much does a care annuity cost?
It’s not possible to give a direct quote for the cost of a care needs annuity, but let’s start with the lump sum.
The amount you receive in return is based on your initial lump sum as well as your health and life expectancy.
Either your insurance provider can calculate what you’ll get from the lump sum you provide.
Or you work out how much you need, and the insurance provider can advise you on the amount you’ll need to pay.
What factors affect the cost of a care annuity?
These factors affect the amount you receive as regular income from the lump sum that you pay.
- Your age – generally you must be over 60
- Care annuity interest rates – these fluctuate based on inflation
- What you need to pay for care
- Whether you need an income that increases over time
- Life expectancy
- Health
Taking out a care annuity is a serious financial decision, so it’s important to discuss your options with a financial adviser.
How to pay for a care annuity?
Care annuities are expensive as they require a lump sum to be paid up front.
This means that you have to have the available cash to buy your insurance policy, which might mean selling assets.
But if that’s not an option, find out about how to avoid selling your house to pay for care.
For property owners, you could use the value in your home – find out more in our guide: what is equity release?
How can a care need annuity be used?
When it comes to paying care costs, you are either classed as a self-funder or receive partial or full funding from the local authority.
For partial funders, a care annuity could make paying for care home fees more affordable.
So the money you have from your policy can be used to pay the extra cost towards a more expensive home.
Similarly, if you receive local authority funding for care in your own home it could help you access more comprehensive care.
Can a care annuity cover full care costs?
A care annuity should be used to cover extra costs associated with care rather than be the sole source of payment.
Whether you’re a self-funder or receiving funding, there can be a discrepancy between available funds and the cost of care.
For example, if the cost of monthly care increases due to price hikes, requiring more care or making alternative arrangements.
And if you are receiving partial funding your care annuity policy acts as a top-up payment for the care you need.
Confused about care funding?
Is a care annuity suitable for everyone?
While care annuities might be the perfect solution for some individuals, they just aren’t suitable for everyone.
As we saw earlier, there are two types of care needs annuity – the immediate needs and the deferred needs.
Who is an immediate needs care annuity suitable for?
An immediate needs annuity is suitable for people already receiving care or those just about to start.
Needs could be minimal at the start, but having a policy will help cover rising care costs as needs increase.
So you get the peace of mind of knowing that your costs are covered in every eventuality.
But being able to buy a plan does require an upfront lump sum, so having the money available is essential.
Who is a deferred needs annuity suitable for?
A deferred needs annuity is suitable for people who aren’t already receiving care, but may need it in the future.
Perhaps you come into some money which can be used for a lump sum payment and want to plan for the future.
It can also be a more cost effective way of spending your money, though it requires forward planning.
Should I get a care needs annuity?
Don’t get a care needs annuity if you:
- Can’t provide a lump sum upfront
- Might only need care temporarily – you can’t get your money back or cancel the plan.
- Might want your money back in the future
- You might be entitled to NHS Continuing Care funding – you could get funding for your primary health need.
What are the benefits of a care annuity plan?
Having a care annuity provides you with a regular income so won’t leave you wondering what happens when the money runs out.
This income is also not taxable when paid directly to the home care provider, so it won’t affect your financial status.
And because the lump sum is paid from your estate, it can be beneficial for inheritance tax threshold purposes.
Plus, it is a reliable way of safeguarding against the risk of running out of money when managed correctly.
What are the risks of a care annuity plan?
- If you die earlier than expected, you won’t get any money that you invested back unless you have capital protection.
- Payments could affect means tested benefits.
- You have a cooling off period of 30 days after purchase but after that the decision is final.
- If you have rapidly increasing and expensive care needs the annuity may not cover them entirely.
What happens to your money in a care annuity?
After you’ve paid your lump sum, you’ll receive payments that reflect the value of inflation, which protects against rising costs.
These payments are made until the policyholder dies.
To protect your money after you die, your policy can include a ‘capital protection’ clause.
Which means your family can reclaim some of the investment you made if you die earlier than expected.
Are there other options for paying for care?
If a care annuity doesn’t sound right for you, there are some other options when it comes to paying for care.
If you own a property, you might want to consider using an equity release scheme, to access money while receiving care at home.
Or you could look into putting a house in trust to avoid care home fees – as it could make you eligible for funding.
Plus, there are a number of other financial benefits for elderly that can help you with extra care costs.
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Worried about your loved one’s later life care?
When it comes to looking after your loved ones, understanding their care needs is a good place to start.
Using the Sweet Pea platform, you can enter their details and get matched with appropriate home care providers.
Whether it’s home help or live-in care, Sweet Pea’s care network means you’ll find what you’re looking for, and more.
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