The annuities that bridge the gap as care fees outstrip mortgage costs
Sunday 08 August 2004
Although the mortgage payment tends to be the biggest outgoing for most people, this isn't the case if you're paying care fees for an elderly relative in a nursing home. Owain Wright, the head of the Care Funding Bureau (CFB), says the average cost of a mortgage is £400 a month, while the average cost of a care home is £400 a week.
Not only is this a huge sum but the recent withdrawal of pre-funded care policies by insurance firms means those who have to pay for long-term care for elderly relatives have few options. The state offers no help if the person entering care has more than £20,000 in savings or assets, so many have to sell the family home to cover the cost.
But one option is worth considering: an "immediate-needs" or care-fees annuity. In response to readers' letters requesting more information, we look at this option here.
Aren't annuities something to do with pensions? My elderly mother already has a pension.
Everyone with a private pension must buy an annuity with three-quarters of their pension pot by the age of 75. This gives a guaranteed income for life.
However, you don't need a pension pot to buy an annuity. An immediate-needs policy is simply an income for life bought using a lump sum and is usually purchased after an elderly person has been admitted to a care home. Even if they already have a pension, they can also buy an immediate-needs annuity.
Aren't annuity rates rather low?
The rates are edging upwards after years of disappointing returns. But the big advantage of an immediate-needs annuity is that you receive a much higher income than with a standard policy because the insurer probably won't have to pay out for as long due to the elderly relative's reduced life expectancy.
Mr Wright at the CFB says you can expect a 10 to 12 per cent return on a regular annuity. With an immediate-needs policy, it could be as high as 25 to 33 per cent.
What are the advantages?
If you set up an immediate-needs annuity in the right way, with the cash paid on a monthly basis direct to the nursing home, no tax is payable - unlike with standard annuities. They are also individually underwritten, taking your relative's particular circumstances into account.
The reason immediate-needs annuities are growing in popularity is that you know exactly how much your relative's care will cost. The lump sum is used to buy a regular income until that person dies. The remainder of the estate is safe as there is no danger of funding "running out".
Are there any disadvantages?
The main drawback is cost (see below). And if the elderly relative dies soon after the annuity is taken out, the lump sum used to buy it is lost to the estate.
So what's the damage?
Immediate-needs annuities aren't cheap. To work out how big a lump sum you need, subtract the elderly person's income from the cost of the care home. The annuity needs to cover the shortfall. For example, if the cost of the care home is £25,000 and the elderly person has an income of £10,000, the gap is £15,000. The cost is, on average, four times the benefit amount - in this instance £60,000, which is the lump sum needed to purchase the annuity.
Where can I buy one?
Only four providers offer these annuities and, even though they use the same application form and medical criteria when calculating the annuity, the lump sum required varies greatly.
For example, one client who contacted the CFB needed to cover fees of £23,400 a year. PPP Healthcare declined to cover the client at all, while GE Life wanted a lump sum of £130,000 and Norwich Union only £57,000.
Where can I get more details?
Social services may not be the best place to go. "The information people receive from local authorities or the NHS may not paint a clear picture of what they are entitled to," warns Philip Spiers of Help the Aged Care Fees Advice. "We encourage anyone entering into care to contact us for impartial guidance."
Contact Help the Aged on 0500 767476 or www.helptheaged. org.uk/carefees. The CFB has a free information pack; call 0800 071 8333.
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