Most people plan for retirement and put money aside in various pension pots. It is however far less common to plan for the cost of long-term care, be it at home or in a care home environment.
Perhaps this is because we are a nation of optimists and do not want to plan for something which may or may not be required. It can also be very difficult to plan for; the need for immediate long-term care can occur over-night without warning.
What is a Care Needs Annuity?
In its most simplistic form, a Care Needs Annuity, also known as an Immediate Needs Annuity, is an insurance policy. For an initial up-front investment, the annuity guarantees that your ongoing care costs are covered.
Who is a Care Annuity for?
A Care Fees Annuity is designed for people who require long-term care either in their own home or within a residential care home. If your care needs are only temporary then it is not advised to invest in an Annuity.
A Care Annuity requires an initial lump-sum cash investment. Commonly, Care Annuities are purchased by the families of people with long-term care needs after the sale of their home/estate.
What is the cost of a Care Annuity?
The average cost of a Care Annuity is between £70,000 and £100,000 but can be a lot higher depending on the situation.
The two main bearings on cost are:
- The level of income required to fund ongoing care needs: 24-hour care comes at a higher cost to daily home care calls.
- Your current age and life expectancy: the cost of an annuity to fund a terminal illness will likely be less than the cost of an annuity for somebody with early onset dementia as the life expectancy is significantly different.
When is a Care Annuity not the right course of action?
If you have long-term care needs and have funds of less than £23,250 you will be eligible for some level of Local Authority funding, see here for further information; it may also be useful to you to find out what benefits you are entitled to.
Similarly, if you have long-term or short-term nursing needs you may be eligible for Continuing Healthcare funding (CHC). Find out more about the types of funding available to people requiring nursing care here.
Care Annuity Case Studies
The following case-studies have been shared by FCA regulated Financial Advisers, Flying Colours. Their SOLLA accredited care fees experts have been successfully advising older people and their families for many years on how best to pay for care.
After many years of being cared for by her daughter Carol, Ruby a retired teacher, aged 87 and suffering from dementia, entered a dementia specialist care home costing £42,000 per annum. At the time of going into care she had savings in her bank totalling £180,000 having previously sold her home when she moved to live with Carol. She also had an income from her state pension and teacher’s pension of £18,700, which left an overall shortfall to find of £23,300. Now that Carol could no longer provide the care that Ruby needed, she just wanted her Mum to get the best possible care for the rest of her life. Carol’s own financial circumstances meant that she would not be able to “top up” mum’s fees if her money ran out.
The Flying Colours Solution; Carol’s Financial Adviser immediately identified that Attendance Allowance could be claimed at the higher rate thus reducing the shortfall by £4,321 to £18,979. Following a detailed report outlining various options Carol decided to purchase a “Care Fees Annuity Plan” for her mum for a capital outlay of £104,384. This provided Ruby with an additional guaranteed ‘tax free’ income of £1,582 pm increasing by RPI for the rest of her life. With the shortfall taken care of and allowing for a small cash fund for incidental expenses, this meant that the majority of Ruby’s remaining capital (£70,000) could safely be placed into a tax efficient, low risk investment arranged to help see it grow.
Sadly, after 7 years, Ruby died age 94, by which time the care annuity had paid out a total of £147,005 towards the cost of her care, against a purchase price of just £104,384. With fee increases, Ruby had paid a total of £321,788 to the home over the seven years, however when her Estate was settled Carol was still able to inherit £95,920 from Ruby’s original £180,000.
John, aged 82 a widower was enjoying an active retirement including a pint in his local pub until sadly he contracted Motor Neurones Disease. Determined to stay at home for as long as he could, he arranged to live on the ground floor and finance various home adaptations. His homecare costs amounted to £35,000 per annum, which could only be partly met from his income leaving a sizeable shortfall to find of £18,000.
The Flying Colours Solution; John was advised to claim attendance allowance and to fund his shortfall he chose a care fee payment plan increasing by 5% annually at a cost of £48,000. Eighteen months later his health further deteriorated and he had to move into a local nursing home. No extra outlay was needed because the tax free care plan income with his NHS nursing contribution was adequate to meet the cost. His house was later sold and the proceeds invested for growth into a range of low risk investments. At this point in time John had spent over £42,000 on his care costs but his remaining assets have the potential to continue growing steadily to provide the inheritance he wishes to leave his two sons.