Care Fees Annuity: Funding Care Costs

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 overnight without warning and costs can vary significantly.

What is a Care Needs Annuity?

In its most simplistic form, a Care Fees Annuity, also known as an Immediate Needs Annuity, is an insurance policy, purchased at the time that care is needed (unlike most ‘insurance’ which has to be put in place ahead of any claim). Once purchased, you have a guaranteed income for life. It is usually structured in such a way as to plug any gap between your existing income (such as pensions) and your care fees. The income is tax-free if paid directly to a CQC-registered care provider.

Top Tip: Make sure you seek advice from a SOLLA Accredited Adviser, such as Eldercare Solutions, who has lots of experience advising families about this niche financial product.  You may want to use one that does not charge for getting you ‘whole of market’ quotes so that you can fully understand your options with at no cost or obligation.

Who is a Care Annuity for?

A Care Fees Annuity is designed for people who require long-term care either in their own homes or within a residential care home. If your care needs are only temporary, you are not advised to buy one of these Annuities.

A Care Fees Annuity is purchased with a one-off, upfront lump sum payment, often coming from the proceeds of the sale of the family home, for example. It is for people who want the peace of mind of a guaranteed income (to pay care fees) for life. It carries risk, as there is usually no refund to the estate if the individual were to die before the policy has reached the ‘breakeven point’ but conversely the Annuity Provider has to carry on paying for life, even if that is many years past the breakeven point.

What is the cost of a Care Annuity?

The average cost of a Care Annuity varies so much it is difficult to give a helpful figure but you might find this ‘ready reckoner’ useful as a starting point (developed by a Trusted Partner, Eldercare Solutions).

As a general rule of thumb:

  1. The older someone is, the lower the cost of the Care Fees Annuity
  2. The more poorly someone is, the lower the cost of the Care Fees Annuity
  3. The higher the income required, the higher the cost of the Care Fees Annuity

Every case is individually underwritten, however, so all medical background and care needs are understood and taken into account in the pricing.

When should you not buy a Care Fees Annuity?

It is essential that a Care Fees Annuity is ‘future-proofed’ because having one will usually opt you out of any future Local Authority Funding. Any income from the Annuity would be taken into account as part of any future financial assessment, meaning you are unlikely to get any support.

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.

A SOLLA-accredited adviser such as Eldercare Solutions can make sure you fully understand whether this product is appropriate for you.

Care Annuity Case Study

The following case study has been shared by FCA-regulated, Care Funding Specialist, Eldercare Solutions. Their SOLLA-accredited advisers have been advising older people and their families for many years on how best to pay for care. Please take a look at their Trustpilot Reviews here.

Mr Jacobs got in touch with the team at Eldercare Solutions a few months after his 92-year-old mother had moved into a care home. She had suffered a stroke which left her unable to cope in her own home any longer. He was already becoming concerned at the alarming rate at which his mother’s capital was being eroded, especially with interest rates being quite low. At the time that we first spoke with the family we were able to establish the following facts:

  • Mrs Jacobs’ savings (predominantly the proceeds of her property sale) totalled £250,000
  • She had a total net annual income of just under £23,000 but the care home fees, including a small personal spending allowance, were £950 per week – just under £49,500 per year.
  • On paper, this left Mrs Jacobs with an annual shortfall (the gap between her income and the fees) of about £26,500

After fully assessing the situation and researching the various options available, we were able to put some alternative funding solutions for the Jacobs family. As a result, they decided to purchase a Care Fees Annuity at a cost of just under £108,000. This meant they could ‘ringfence’ the other £142,000.

The plan guaranteed to pay £26,500 (tax-free) every year for the rest of Mrs Jacobs’ life. Rather than include an annual increase within the plan, the family decided to meet any fee increases from interest on the capital that was left over. The family accepted that they were, in a sense, taking a financial gamble, but the financial certainty and peace of mind achieved and the reassurance that Mrs Jacobs’ money would never run out seemed to them to make this a risk worth taking.

We had offered the family the option of buying a 2-year deferred plan at a cost of £56,000. This would have meant them having to cover the £26,500 shortfall themselves in years 1 and 2 with the plan paying out thereafter for the rest of Mrs Jacobs’ life. This would have resulted in a total overall cost including the plan of £109,000 (only slightly more than taking the immediate plan option) but, if Mrs Jacobs were to have died soon after buying the plan, less money would have been lost to the Insurance Company.

Loss of capital was not, in this family’s case, of concern so the immediate option was chosen.

Mrs Jacobs and her situation are real, but her name has been changed for use in this case study, which is for illustrative purposes only. Please don’t be put off if your circumstances do not ‘fit’ this case study. Our clients’ circumstances are very varied and so a different solution may be appropriate for you.

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