An immediate needs annuity is a product designed to help those already in care to meet the costs of long term care. The annuity, in exchange for a lump sum fund makes guaranteed payments towards care until the end of life. The payments are tax free so long as they are paid to a recognised care provider.
One of the main concerns that people have about immediate care annuities is that the amount to be paid out is fixed and does not change over time. This means that even if the cost of care increases, the amount payable through the annuity remains constant, and any difference must be met by the client.
A flip side of this scenario is if the cost of care reduces for any reason. The two main reasons that the cost of long term care could reduce over time is because of a change of residential care home or nursing home, or because you are awarded registered nursing care contribution from the NHS.
In case the amount paid by a care annuity exceeds the cost of your care, then it may be possible to convert your immediate needs annuity to a purchased life annuity. This will enable you to receive the additional payments. However, it is important to note that this additional income will be taxable by the Inland Revenue at the savings rate of 20%.
The tax rate applicable is that of the income bracket into which you will fall. Your total income from all sources will be considered, and this will include any other annuities, savings and investments. If you fall into a higher tax bracket, then the additional annuity payment will be charged at a higher rate.
A care annuity is a niche financial product designed to meet very specific needs. It is designed for those faced with the prospect of potentially unending costs of care, and who also want to protect their savings and assets from being corroded by care costs.
If you are considering opting for an immediate needs annuity to meet the costs of on-going care, it is important to seek advice from a qualified financial advisor who can give you impartial and objective advice not only about whether it is the right option for you, but also advise you about the different implications of having an immediate needs annuity.