This Free Online Guide shows you the benefits of capping the cost of care using an immediate needs annuity including the State Benefits you can apply for, further reducing the capital needed for an annuity. To to find out the capital required for your relative, simply ask for a Free Needs Annuity Quote

Capping the Cost of 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.

An immediate care annuity or immediate needs annuity can help cap the costs allow family members to secure a quality care home for your relative's lifetime with greater control of the finances.

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 left to the beneficiaries, such as children or grandchildren. The following is a breakdown of average costs in different parts of the UK.

The cost of 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).

The Inland Revenue have stated the income is payable tax free as long as the annuity amount is 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.

Residential and nursing homes regularly increase the annual cost of care with higher fees. You can add escalation to cover rising costs agreeing in advance a specific percentage rate each year, even if in the future increases turn out to be higher.

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.

Inheritance Tax

An immediate needs 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 needs 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 needs 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 needs annuity will cap the cost of this care and preserve the remaining estate for the beneficiaries.

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:

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.

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:

State Benefits

There are state benefits for people that require assistance on a daily basis:

	Disability Living Allowance (DLA)
	Mobility Allowance (MA)
	Attendance Allowance (AA)

The DLA and MA can be claimed by people that need help looking after themselves and people that find it difficult to walk and get around.

The DLA is paid at three different rates depending on the help required, lower rate (£21.80 per week) middle rate (£55.10 per week) and higher rate (£82.30 per week). The MA is paid at two different rates depending on the nature and severity of the mobility condition, lower rate (£21.80 per week) and higher rate (£57.45 per week).

Anyone over the age of 65 is eligible to claim for Attendance Allowance if they are either ill or disabled or requires help with a number of activities of daily living such as washing, eating or mobility. The benefit is not means tested and is paid to anyone irrespective of personal wealth and assets.

The applicant needs to explain the type of help they require, when they need this help, details of their medical conditions and other less serious problems they may have as well as the medication they are taking. There are two rates for AA depending on the amount of help required, lower rate (£55.10 per week and higher rate (82.30 per week).

Means Testing

Where an individual is applying for long term care support either, residential care or nursing home care, from either NHS funding or Local Authority, there are a number of limits relating to their personal capital. Capital is defined as including savings, investments and property.

Under section 47 of the NHS Community Care Act 1990, the Social Services must assess each applicant in relation to their needs for residential care or nursing home care. This assessment will determine how much the applicant can afford to pay after taking into account any state benefits they are entitled to claim and any other income they receive less any personal expenses.

If the individual has capital of more than £23,250 in England, (£25,250 in Scotland and £23,750 in Wales) there would be no assistance from the Local Authority.

To cover the long term care costs, full assistance from the Local Authority is provided if the assets are less than £14,250 in England (£15,500 in Scotland and £23,750 in Wales). There is a sliding scale of support where the assets fall between these levels, offset against the amount of income each person already receives.

Your property may be disregarded from your assets in certain circumstances. For example, in England, there a number of factors that can apply:

	Where a spouse or unmarried partner lives in the house;
	If a relative aged over 60 lives in the house;
	If a relative is aged under 60 but is incapacitated;
	Where a child aged under 16 lives in the house and this house is their main home;
	If the property is the sole residence of the former carer of the individual now in care, and this carer gave up their own home in order to look after this individual.

There is also a 3 month property disregard rule. This allows an applicant to access residential care or nursing home care for 3 months and have their property disregarded for means testing.

Therefore the value of other assets such as savings and investments must be less than £23,250 in England to have part of the long term care costs paid by the Local Authority or maximum funding towards long term care if below £14,250 in England. Once the 3 month period is over, the property will then be included for means testing.

NHS Funding

The NHS is legally obligated to provide long term care funding where an individual requires specialist supervision or equipment. If an individual does not meet the NHS funding criteria funding will not be provided on a health care basis and is deemed social care which would be provided by the Local Authority subject to means testing.

The local primary care trust (PCT) is responsible for providing local health services and they determine an individual meets the criteria for NHS funding of long term care. The decisions made by the PCT are not necessarily accurate or consistent and there is difficulty determining what medical conditions warrant health care provided by NHS funding and social care provided by the Local Authority.

This confusion was highlighted in the case of Pamela Coughlan in 1999 who challenged the decision to transfer responsibility for her care from the NHS to the Local Authority. Pamela was partially paralysed resulting in breathing difficulties, required regular catheterisation and was doubly incontinent. By changing from the NHS to Local Authority this would mean Pamela would have to find extra funding to meet her care costs.

The Courts ruled that Pamela meet the NHS criteria of 'complex and intense' needs and that funding her long term care must be provided by the local health authority. Due to the nature of her condition her needs were in a 'wholly different category' from the needs that would be provided by the Local Authority.

Nursing Care Bands

Partial NHS funding is possible for those individuals that do not qualify for full long term care from the NHS. Subsequent to a Royal Commission in 1999 that recommended all health care and personal care to be provided free, changes were introduced in England to provide extra funding but only for health care and not personal care where the care is provided by a registered nurse and only up to certain limits.

Under the Social Care Act 2001 this defines nursing care as the registered nurses contribution to providing, planning and supervising care in a nursing home setting. This does not include time spent by any other personnel such as care assistants however would include the time spent by a registered nurse in the monitoring and supervision of others delegated work relating to long term care.

This change was introduced from 1 October 2001 and means that anyone paying their own nursing home care fees will have a fixed weekly contribution paid by the Department of Health directly to the nursing home care provider. The Nursing Care Contribution is paid at a flat rate of £109.79 per week.

About sharingpensions.co.uk

Sharingpensions.co.uk was created by its founder Colin Thorburn in 2001 to provide a free retirement and income resource to hundreds of thousands of people making their decision making easier and to select the best options including covering the costs of a quality care in a residential or nursing home for relatives.

Colin Thorburn has nineteen years experience in pensions and annuities, is an individual authorised by the Financial Conduct Authority and business is submitted through Blackstone Moregate Ltd which is authorised and regulated by the FCA (no. 459051).