What is Immediate Care Annuity?

Purchasing an Immediate Care Annuity basically means giving some amount of your or your older parent’s capital to an insurance company in exchange for that insurance company guaranteeing to make regular payments of a pre-agreed amount to a care provider for the rest of your ageing parent’s life; these payments are then applied towards their care fees.

The general aim of annuity purchase is to ensure that their care fees will be paid for the rest of their life and to remove the risk that their capital will run out before their death, leaving them with no means to fund the type of care provision they would like.

If your elderly relative’s capital does run out, their Local Authority will have to step in and assume responsibility for providing appropriate care, in an appropriate setting and also the responsibility for paying the care fees involved

However, particularly given the financial pressures on local authorities and care providers, it may be that if capital does run out this could result in some change to your ageing parent’s care provision and you may wish to protect against this happening

The Local Government Information Unit estimates that approximately 25% of care service users who initially start out by self funding their care ultimately run out of money and fall back on state funding (source: Independent Ageing Report March 2011).

The key benefit of purchasing an Annuity is peace of mind, but purchasing an Annuity also involves some potential disadvantages which we have highlighted below. 

What are the Potential Advantages of Annuity Purchase for Elderly Care?

 An Annuity is a simple way forward; you have spent a defined amount of capital and generated a stream of regular defined payments to your care provider in exchange. The payments will be made directly and once the annuity has been purchased there will be no ongoing charges involved.

If your ageing parent lives for a relatively long period of time, the regular payments received by the care provider may ultimately exceed the cost of purchasing the annuity. If this happens your ageing parent and/or their estate will benefit and could receive a good return on the capital spent.

An Immediate Care Annuity can effectively guarantee that your elderly relative protects at least some amount of their capital and therefore that their heirs will receive some level of bequest in due course. Once the Annuity has been purchased this significantly reduces the drain on remaining capital and, therefore, significantly increases the probability that any residual capital will remain intact.

Creating this degree of certainty that care fees will be met can enable your ageing parent to contemplate opportunities for estate planning and Inheritance Tax mitigation. Once the extent of “surplus” capital has been identified the scope for making lifetime gifts or investing in particular forms of Inheritance Tax efficient assets becomes more apparent.

The certainty introduced by an Immediate Care Annuity may also enable them to invest “surplus” capital with fewer restrictions than would sensibly apply if the annuity were not purchased. For example, if care fees are being met by an annuity, it may be possible assume a higher degree of investment risk with a view to achieving greater returns and to take advantage of tax planning opportunities which may not otherwise be practical. Thus the purchase of an annuity can ultimately increase the rate of investment return they receive return on their capital.

Because the payments are made directly to a care provider, they are not taxable. Ultimately, this means that you may receive a higher return on your money than your ageing parent would do were it invested in a form which produces taxable income or capital growth.

An Immediate Care Annuity can be arranged so the regular payments received increase each year in line with a fixed percentage or a price index. This will increase the potential to meet rising care fees.  Note, however, that including index linking in this way will increase the cost of purchasing the Annuity.

It may be possible to contract with a care provider that your elderly relative’s fees will not increase beyond the regular amounts paid to them by the Immediate Care Annuity. If this is possible, it will guarantee that your ageing parent’s fees will be met whilst they continue to receive care from that provider. Note that the care provider will almost certainly require index linking to be built into the Annuity and any guarantee would obviously not continue if your ageing parent changes their care provider. A change of provider may be necessary if their care needs change over time.

The payments to a care provider are portable between care providers and a move to an alternative care environment will not affect them in any way. The payments will simply be re-directed to the new care provider.

If your relative becomes eligible for NHS Continuing Care Funding and thus no longer have to meet their own care fees the payments which were paid to their care provider will be re-directed back to them. The payments do, at that stage, become potentially taxable income but, because of the way they are structured, the majority of each payment should be treated as a non-taxable return of their capital and the resulting tax liability should be relatively small.

What Are The Potential Disadvantages of Annuity Purchase?

The purchase of an Immediate Care Annuity is an irrevocable decision. Essentially you have spent whatever amount is required to purchase the annuity payment stream and, unless some degree of capital protection has been built in you will not see any part of this capital again. Purchasing an Annuity offers less flexibility to adapt to changing circumstances than your ageing parent would potentially have if they retain their capital and hold it on deposit or in the form of investments.

Generally it is possible to build in some degree of capital protection into an Annuity so that, in the event of your elderly relative’s early death, a capital sum would be repaid. However there can be no guarantee, even if capital protection is included, that your ageing parent or their heirs will receive back the full amount of the money that has been spent to purchase the Annuity. Particularly if your elderly relative’s death occurs in the relatively short term, the purchase of an Immediate Care Annuity could result in capital loss to their estate.

The amount of regular payment received is fixed and cannot be varied. There can be no guarantee that the cost of your ageing parent’s care will not increase beyond the level of annuity payments, even if they are set up to increase on an annual basis, unless this can be contractually agreed with the care provider. This is particularly the case if your elderly relative’s care needs increase over time and/or they change their care arrangements and care provider.

What is The Cost of an Annuity? 

Each Annuity is individually underwritten and so the ultimate cost will depend upon your ageing parent’s own specific circumstances. It is therefore not possible to give any firm indication of what the cost will be without obtaining firm quotations from every insurance company in the market, of which there are currently only two.

Quotations are obtained by submitting a standard application for to both companies.

The form requires your elderly relative to answer simple questions relating to their age, gender and health and it also requires them to allow the insurance company to obtain information about their health from your Doctor.

The process of obtaining quotations usually takes a minimum of 6 to 8 weeks. It is very unlikely that your elderly relative will not be offered a quotation. They are not bound to accept the Annuity quotation which is offered to them.

At this point we would explain the potential advantages and disadvantages in full detail and help you assess whether or not the Annuity approach is on balance the best way forward for you.

Purely indicative costs for the purchase price of an Immediate Care Annuity (arranged on the basis that no capital is returned in the event of early death and no-increasing regular payments) are as follows:

Source:  Lifetime Care 25 February 2011

Partnership Assurance, which is one of the insurance companies which provides Immediate Care Annuities, has produced statistics which show that the average length of time a self-funded resident will require residential care is approximately 4 years and that approximately 12% of care home residents would be expected to require care for 8 years or more

An Immediate Care Annuity is not the only way to meet care fees and there are other alternatives. Anyone needing to consider how to fund care should consult a professional financial adviser who has all of the relevant specialist qualifications which are required by the Financial Services Authority to advise in this field. A good starting point is the Society of Later Life Advisers(SOLLA)

Dave Robinson is a Partner in Albert Goodman Chartered Accountants and a Director of Albert Goodman Chartered Financial Planners and WBW Chartered Financial Planners

Dave is an ex-practising Accountant with a background in personal taxation. For the last 20 years he has practised exclusively in the field of personal financial planning and he is one of few Independent Financial Advisers to have achieved both Chartered and Certified Financial Planner status. He also holds an Investment Management Certificate and he is a Member of The Society of Trust & Estate Practitioners (STEP) and The Society of Later Life Advisers (SOLLA).  Dave can be contacted on 01934 642222 or  [email protected]