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Guide to paying for care
Half a million people are in care homes in the UK and only a small proportion receive some kind of assistance from the state with the balance of the cost provided from savings. To allow family members greater control of the finances it is possible to cap these high costs by purchasing an immediate needs annuity.
The cost of long term care will depend on the health of the
individual. Where the individual only needs companionship
as well as help with the daily activities of life such as
washing, feeding and dressing, this is provided by a residential
care home. Where the individual suffers from a medical condition
that requires the attention of a nurse, this is provided by
a nursing home.
An individual may be entitled to state benefits
or NHS
funding for long
term care, even if they pay their own nursing home costs.
Residential care may cost an average from £24,232 to
£30,888 depending on the location in the UK, whereas
nursing care could cost an average from £28,756 to £41,912
depending on the location in the UK.
This means that if the
estate is large, a significant amount of its value could be
used on long
term care if the elderly relative lives considerably longer
than expected and very little eventually left to the beneficiaries,
such as children or grandchildren. The following is a breakdown
of average costs in different parts of the UK.
|
Residential |
Nursing Care |
|
£29,328 |
£38,272 |
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£26,312 |
£33,800 |
|
£25,324 |
£30,628 |
|
£24,492 |
£33,800 |
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£24,336 |
£33,644 |
|
£24,232 |
£28,756 |
|
£28,860 |
£34,944 |
|
£30,888 |
£41,912 |
|
£28,652 |
£40,872 |
|
£25,532 |
£33,592 |
|
£25,740 |
£36,400 |
| Example - Shows the approximate
annual cost of residential care and nursing home
care for different regions of the UK. |
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The cost of long term care can be capped or limited to a
known amount by using an immediate needs annuity. This would
protect the estate from capital erosion in the event of the
individual living significantly beyond their life expectancy.
Immediate needs annuity
An immediate needs annuity policy can be purchased where an
elderly relative is already in either residential care or
a nursing care home or is about to be admitted. The annuity
is paid directly to the care provider for the life of the
individual and the Inland Revenue has agreed for this to be
paid gross (no tax on the income).
A
purchased
life annuity is an alternative to an immediate
needs annuity where the income is paid to the individual
and is partially taxed. This is more suitable for people that
are in good health and living in their own homes and are looking
for a higher guaranteed rate of return from their capital
than bank interest to supplement their income.
The Inland Revenue have stated that the amount payable by
the annuity can only be equal to or less than the actual charge
made by the care home, there cannot be a surplus to the estate,
should there be a reduction in the home care fees charged
or in the unlikely event the individual returns to their home
to look after themselves.
The usual method of purchase is a single lump sum payment
in exchange for an income to cover all or part of the costs
of long term care for the life of the individual. It is also
possible to have different options depending on the circumstances
and assets where the immediate needs annuity can be deferred.
Other features that can be added to the annuity are escalation
rates and capital protection. Escalation attached to an annuity
means the income paid to the care home rises by a fixed percentage
each year and protects the income against inflation.
Rates
can be chosen between 1% and 8% of escalation. Capital protection
allows the original capital to be protected in the event of
the early death of the individual. The percentage of capital
to be protected, up to usually 75%, would be returned to the
estate less all income paid to the care home. This option
would increase the capital cost of the immediate needs
annuity.
The following immediate needs annuity table shows the capital
required to provide an annual income of £12,000 (and assumes that the income will increase by 5% each year).
These examples are based on the average rates for a wide range of medical conditions for clients in each age band, and should be used as a guide only. For an indication of the annuity rate more specific to your or a relatives circumstances, medical conditions and ability to perform activities of daily living you should complete the immediate
needs quote.
Please note that since December 2012, all annuity rates must now be quoted on a gender-neutral basis.
| Average Capital Cost for Annuity |
| Age |
Capital |
| 70 |
£164,000 |
| 75 |
£127,000 |
| 80 |
£94,000 |
| 85 |
£73,000 |
| 90 |
£56,000 |
| Example - Shows the average
capital cost of
an annuity income of £12,000 pa with 5% escalation for different ages. |
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Inheritance Tax
An immediate care annuity can benefit the estate where there is a liability to inheritance tax (IHT). There is no IHT liable where the value of the estate is below an individuals personal threshold of £325,000, or if unused relief has been transferred from a spouse this could be as much as £650,000.
Inheritance tax is liable on the value of the estate above the threshold at a rate of 40%.
Using an immediate care annuity to pay for the costs of a care home would remove this capital from the estate and immediately reduce the expected IHT liability.
For example, an estate worth £750,000 with a IHT threshold of £650,000 would have a expected IHT liability on death of 40% of £100,000 or £40,000.
Although self funding care for a relative would reduce the size of the estate and also the IHT liability, it is unknown how the estate would be further eroded in the future.
If the cost of a care annuity was £100,000 the value of the estate would reduce to the threshold of £650,000 removing the expected inheritance tax charge. At the same time the care annuity will cap the cost of this care and preserve the remaining estate for the beneficiaries.
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Deferred Annuity
If you wish to have the security of an Annuity but would prefer to reduce the amount of capital required for the premium, you could opt to purchase the Annuity on a deferred basis.
The Annuity is still purchased immediately, but the first payment to the care provider will not be made until after a specified number of years have elapsed (the ‘Deferred Period’).
The Deferred Period can be selected to last from between one to five years. The longer the Deferred Period, the less the Annuity will cost, but you will of course have to cover the cost of the care fees during the Deferred Period out of capital.
If you include the escalation feature for the Annuity, this feature will still be active during the Deferred Period. So, for example, if you purchase a Deferred Annuity for £2,000 per month including 5% escalation (with a 2 year Deferred Period) the amount of Annuity which becomes payable at the start of year 3 would be £2,205 per month, having benefited from 2 years of escalation.
The table below shows examples of the comparative premiums between Immediate and Deferred Annuities, for an Annuity of £12,000 per annum, escalating at 5% each year:
| How a Deferred Annuity Compares |
| Age |
Capital required to purchase an
Immediate Annuity |
Capital required to purchase a
Deferred Annuity
(deferred 2 years) |
| 80 |
£94,000 |
£70,850 |
| 85 |
£73,000 |
£49,700 |
| Example - Deferred annuity based on an annuity income of £12,000 pa with 5% escalation for different ages. |
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These examples are based on the average rates for a wide range of medical conditions for clients in each age band, and should be used as a guide only. For an indication of the annuity rate more specific to your or a relatives circumstances, medical conditions and ability to perform activities of daily living.
Medical conditions
Underwriters will use various approaches to underwrite an application for immediate needs cover and this includes their own experience of risks and possibly the Anderton Diagnosis Index. This index considers the medical condition suffered by the applicant as well as their ability to perform certain activities of daily living. The medical conditions most commonly found in applicants is shown in the following table, however, any illness or disease that reduces the life expectancy of the individual would be considered by the underwriters. It is important to request a quote specific to you or an elderly relatives medical condition as rates can differ significantly due to the health and life expectancy of the individual.
An immediate needs annuity is something that allows people to plan with some degree of certainty when they are potentially faced with an open ended amount of care being required. This sort of annuity is suited to just these situations and can certainly provide some peace of mind as well as a degree of certainty regards the financial situation of the applicant. Considering the activities of daily living is one of the ways in which these sorts of annuity can be assessed. Our website details all this, giving you all the information that you may need in order to assess the situation.
| Common Medical Conditions |
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| Note - Rates can differ significantly
due to the health of the individual . For an accurate
quote specific to you or an elderly relatives medical
condition(s), please submit a immediate
needs quote |
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Activities of daily living
There are a number of activities of daily living that would
be considered by the providers. The more of these that the individual
cannot perform independently, the higher the annuity rate in
general, as follows:
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Communications
Such as speech, are they easy to understand, difficult
to understand or unintelligible; |
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Orientation and behaviour
Is the person mentally alert, are they vague with lucid
period or confused and disorientated; |
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Feeding and nutrition
Is the individual able to feed themselves, or do they
need assistance or are unable to feed themselves. |
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Dressing
Can they dress themselves or do they need partial or full
assistance; |
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Transfer
Such as moving from bed to chair without, or do they need
some or full assistance; |
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Toilet use
Can they use the toilet unaided, or do they need some
or full assistance; |
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Stairs
Can they walk up and down stairs unaided, or do they need
some help or cannot manage stairs at all; |
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Continence
Is the individual continent, or do they have the occasional
accident or are they incontinent.
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