An Introduction To Immediate Needs Annuities

Any form of annuity works by swapping an amount of money in return for the payment of a guaranteed income for life.

There are various types of annuity. The specific purpose of an immediate needs annuity is to help fund all or part of an individual’s ongoing care costs.

Instead of paying as you go, you pay a lump sum premium upon purchase that then provides a secure level of income to cover care fees each month.

Immediate needs annuities can offer a variety of options.

One option is to increase the amount of income paid by the annuity each year. Another is to ensure that a minimum % of the total premium will be paid which is known as capital protection.

Your financial advisor will be able to explain your options clearly.

Unfortunately, most people find that when they start receiving care, they do not have sufficient regular income to be able to meet the full costs incurred

Many people will take a “pay as you go” approach, which is to drawdown on their assets each month to order to meet the shortfall.

Depending upon the amount of assets that someone holds, this approach runs the very real risk of funds running out.

An immediate needs annuity provides an alternative option.

Immediate needs annuities are available from four different insurance companies in the UK.

These are:

• Aviva
• Just
• Legal and General
• National Friendly

Your financial advisor will be able to obtain a range of quotes and make recommendations based on your needs.

To be eligible for an immediate needs annuity, the individual concerned has to either be already in receipt of care or expected to be imminently.

Obtaining quotes can be done in conjunction with the individual receiving care, or by someone acting legally on their behalf – more often than not an attorney.

The first step is to consult with a financial advisor, and to complete a standard questionnaire.

Immediate needs annuities cannot be purchased directly from the insurance companies. A financial advisor will have to be involved to support you, and this advisor needs to hold a specialised Long Term Care Qualification.

When considering which advisor to work with, we would strongly suggest that you ensure that they are accredited by the Society of Later Life Advisors (or “SOLLA” as they are known.)

SOLLA are a not-for-profit organisation dedicated to higher standards and accessibility to regulated financial advice for older people and their families.

The premium for an annuity is set by the insurers on a case-by-case basis depending upon their assessment of life expectancy. Therefore it isn’t possible to provide a cost without going through the quote process.

A very rough estimate to use for someone in residential care would be a figure of 4 to 5 times the annual income required (for example, £160,000 to £200,000 for an annuity paying £40,000 per year).

The cost will also be influenced by a choice to increase the income paid each year and/or to include capital protection.

As long as the annuity is paid directly to the provider of the care required, then the income payments are free of any tax.

This can make the product an attractive option when compared with a ‘pay as you go’ approach.

The end-to-end process from initial conversation through to income being paid from the annuity usually takes a minimum 3 months.

This means it’s worth starting the process at the earliest opportunity.

An immediate needs annuity won’t be right in every circumstance.

It’s important to bear in mind that you could get back less than you paid to purchase the annuity, even with capital protection. Higher than expected increases in care fees may give rise to a shortfall in future years and the income received from the annuity may affect means-tested benefits. And once purchased, it can’t be cancelled – as is the case with other annuities.