Paying for long-term care can be financially overwhelming, especially when a loved one’s savings are at risk of running out. One reader faces this dilemma with their 86-year-old mother, who has been in a care home for eight years and is currently self-funding her £60,000 annual care fees.
With her pensions covering only £20,000 per year, her savings are projected to last six more years. The question now is: Should she buy an immediate needs annuity to secure lifelong care funding?
Understanding Immediate Needs Annuities
An immediate needs annuity is a financial product designed to cover the gap between a person’s income and their care costs. Key features include:
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Lifetime coverage – Payments continue for as long as the individual lives.
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Tax-free payouts – Funds go directly to the care home, avoiding income tax.
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Inflation protection – Some policies offer RPI-linked increases to keep up with rising care costs.
In this case, a quote for a £270,000 annuity would provide £40,000 per year (RPI-linked), effectively covering the current shortfall. However, this would deplete most of her remaining assets, leaving only £30,000 in cash.
The Pros and Cons of an Immediate Needs Annuity
✅ Advantages
✔ Guaranteed Income for Life – Ensures care fees are covered indefinitely, even if she lives beyond 100.
✔ Protection Against Rising Costs – RPI-linked increases help offset inflation.
✔ Peace of Mind – Prevents the risk of moving to a lower-quality care home if funds run out.
❌ Drawbacks
✖ High Upfront Cost – The £270,000 premium is a significant commitment.
✖ No Refund if She Passes Early – If she dies sooner than expected, the remaining funds are lost (unless a guarantee period is added).
✖ Local Authority Funding May Still Be Needed – If her remaining £30,000 is depleted, she may still require council support.
What Happens If She Doesn’t Buy the Annuity?
If no action is taken, her savings will run out in six years. At that point:
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She would need to apply for local authority funding.
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Most councils only cover basic care home costs, meaning she might have to move to a cheaper facility.
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“Third-party top-ups” (where family members pay extra for better care) may be required, but the reader has stated this isn’t an option.
According to the Office for National Statistics (ONS), an 86-year-old woman has an average life expectancy of 93, but there’s a 25% chance she’ll live to 96 and a 10% chance she’ll reach 99. This suggests a real risk of outliving her savings.
Alternative Options to Consider
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Deferred Annuity – Delaying the start of payments could reduce the upfront cost but requires covering fees in the interim.
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Partial Annuity – Using only part of her savings to reduce risk while keeping some funds liquid.
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Negotiating with the Care Home – Some facilities offer lower rates for long-term residents or smaller rooms.
Expert Insight from Steve Webb
Steve Webb, former UK Pensions Minister, highlights:
“Immediate needs annuities can provide financial security, but they require careful consideration. The key question is whether the certainty of lifelong coverage outweighs the risk of losing money if your mother passes away earlier than expected.”
For further guidance on care funding, check out MoneySavingExpert’s guide to care fees or the Age UK advice page.
Final Verdict: Is It Worth It?
If securing your mother’s current care home is the priority, the annuity could be a sensible choice—especially given her potential longevity. However, if flexibility and preserving inheritance are concerns, alternatives like partial funding or negotiation may be preferable.
Have you faced a similar care funding dilemma? Share your thoughts in the comments below.
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✅ Actionable Advice – Suggested alternatives beyond just the annuity.
