During your working life, your focus may be on building the wealth you need to achieve your goals. As you get older, you might need to start planning how you will use your savings to fund your retirement.
It’s important that you draw sustainably from your retirement savings so you can maintain your lifestyle in your later years without running out of money. You’ll also need to consider other potential expenses, including care costs.
The cost of long-term care is rising and if you don’t plan ahead, you could risk spending the majority of your savings. Fortunately, there are ways that you can cover these expenses, including an “immediate needs annuity”, which may pay towards your care costs for the rest of your life.
Read on to learn what you could pay for care in the future and how an immediate needs annuity might help you manage this additional cost.
The average cost of a residential care home in the UK is around £800 a week
If you fall ill and require long-term care, either in your home or a residential facility, it could be very costly.
In fact, according to Age UK, the average weekly cost of a residential care home in the UK in 2024 is around £800. This rises to £1,078 if you require nursing care.
You only receive support with care costs from the local authority once your total assets – including your home – fall below £23,250. This is known as your “upper capital limit” (UCL).
If you require care, you may have to spend a significant portion of your retirement savings – and potentially even sell your home – before your assets fall below the UCL and you benefit from financial support.
As a result, you might have to make sacrifices to your lifestyle and may not have much wealth left to pass on to your loved ones.
You may be able to avoid this situation by purchasing an immediate needs annuity.
An immediate needs annuity may pay towards your care costs for life
An annuity is an insurance product that provides a regular income for a set period of time – sometimes the rest of your life – in exchange for a lump sum. You might use some or all your pension to purchase an annuity.
An immediate needs annuity is a specific type of annuity that pays towards your care costs for the rest of your life.
These payments are sent directly to your care provider and, depending on the annuity, they may increase by a set amount, or in line with inflation. The latter helps the payments keep up with rising care costs over time.
You typically need to purchase an immediate needs annuity once you’re already receiving care or have arranged care to be implemented soon. This is because you must name the organisation that your annuity provider should pay the income to. If your care needs change, you can later choose a different provider to receive the payments.
The cost of the annuity depends on several factors including:
- Your age
- Current annuity rates
- The level of income you need for care
- Whether the payments increase over time
- Your health and life expectancy – if you’re in poor health you may receive higher payments as the provider expects they’ll be making payments for a shorter period.
Additionally, some annuity providers may allow you to put in a “capital protection clause” for an extra fee. This means that your loved ones could receive a portion of the lump sum you spent on the annuity if you die early.
You can also purchase a “deferred needs” annuity. This works in the same way as an immediate needs annuity, but the payments don’t start right away. Instead, you decide on a date in the future when the payments will begin.
Purchasing an immediate needs annuity could make it easier to plan for care costs
One of the key challenges when planning for care costs is that you don’t know whether you’ll need care in the first place, what type of support you might require and how long you could need to rely on care for.
If you only need care for a few months towards the end of your life, this might not affect your savings too much. Yet, if you require expensive support for several years, you could quite easily deplete most of your savings.
This makes it challenging to plan for care because you don’t know how much it could cost you in the future.
On the other hand, when you purchase an immediate needs annuity, you pay a set amount and could receive an income for care costs for the rest of your life. If the payments don’t cover the full cost of your care, you may need to contribute from your other savings. However, an immediate needs annuity still makes it much easier to plan for care costs.
More importantly, you essentially ringfence a portion of your wealth – the lump sum you pay for the annuity – to pay for care costs. This means that, if you require care for a long period, you’re less likely to deplete your savings or potentially be forced to sell your home to pay for care.
The income from an immediate needs annuity is also tax-free, when paid directly to the care home. In comparison, if you drew flexibly from your pension and then used the funds to pay for care, you may pay Income Tax on that wealth.
You could receive less than you pay for your annuity
While an immediate needs annuity offers peace of mind and could make it easier to manage care costs, there are some potential downsides to consider.
Depending on how long you spend in care, the total payments that go to a care provider might be lower than what you paid for the annuity. That said, you could also draw more than you paid if you live for a long time in care.
Additionally, if you spend a large portion of your savings on an annuity, you may not be able to leave as much wealth to your loved ones.
You may need to consider whether you’re willing to accept these potential downsides in exchange for the peace of mind an immediate needs annuity provides.
A robust financial plan could ensure that you’re able to manage expensive care costs
You could use an immediate needs annuity to help you pay for care should you need it. Alternatively, you might decide to build additional wealth now, so you can pay for care from your savings.
Provided you save enough, you may be able to fund your care without depleting all your savings. And if you don’t need care, you might have more wealth to pass to your loved ones.
This is where a financial plan designed by a professional adviser can provide immense peace of mind.
We can use cashflow planning to help you model how much you might need to spend on care in the future, and how this could affect your savings. We can then discuss the most suitable way to cover those expenses.
If you’re concerned about managing the cost of expensive later-life care, we can discuss your options with you.
Email hello@fcadvice.co.uk or call 0333 241 9900.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, cashflow planning or tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
