How much does a care fees annuity cost, and what is it?

Early discussions are crucial regarding how we will be cared for in our later years and how much we are willing to pay for it

An annuity for care fees is one way to pay for the expense. We examine the benefits and drawbacks.

An insurance plan for covering care expenses is called a care fees annuity, sometimes referred to as an immediate needs annuity. The care fees annuity pays out a regular monthly amount to cover the cost of providing that care in exchange for a one-time lump sum from the person in need of care or their family.

The majority of us have wildly inaccurate estimates of how much care costs can be. According to research for the Just Group Care Report 2025, up to 85% of people who had previously assisted in finding care for a loved one were surprised by the expense.

Compared to industry estimates for self-funders of 66,456, more than half (60%) of those over 45 who participated in the Just survey believed that a year's worth of residential care would cost less than 60,000.

Unfortunately, over three out of ten people (31 percent) thought the annual cost would only be up to £30,000, which is less than half the actual amount.

Millions of families are sleepwalking towards a nasty shock, as the 2025 House of Commons Committee Report on Adult Social Care Reform estimates that four out of five people 65 and older will need some form of care before they pass away.

Annuities for care fees are one possible solution to the issue of how to pay for care, but they have additional expenses. We assess the advantages and disadvantages.

A care annuity: what is it?

An insurance policy that covers the cost of care, whether at home or in a facility, is known as a care annuity, care plans, or immediate needs annuity.

Mel Kenny, a chartered financial planner at Radcliffe & Newlands Wealth and an adviser recognized by the Society of Later Life Advisers (SOLLA), clarified: "An insurer offers a guaranteed income for the remainder of the care resident's life in exchange for a lump sum. Home care costs can also be covered by care annuities. A "

The amount of the lump sum needed to purchase a care annuity depends on each person's unique situation and is directly related to their present state of health and well-being as well as their estimated lifespan.

When paid to a UK-registered care providera care home or a person providing care at homepayments from a care fees annuity are not subject to income tax. This is in contrast to taxable payments from a standard annuity.

Care fees annuities are also different from standard pension annuities in that they are purchased with the customer's personal funds, such as savings, investments, or the proceeds of a home sale, rather than with funds held in a pension. Even so, the total cost of care is frequently covered by a combination of state pensions, pension income, and other sources, possibly including a care annuity.

Are care annuities generally the same?

Because there are differences among care annuities, you must carefully evaluate which kind is best for you or your loved one.

An immediate needs care annuity pays out income starting at the time of purchase. Deferred care annuity is an additional option; the premium is lower, but the income starts at a predetermined future date.

You can also choose a care annuity with certain protective features, perhaps best thought of as added insurance, though these tend to be more expensive.

For instance, up to 75% of the original payout can be protected. In other words, however much has already been paid out to cover care costs, the estate of the person for whom the care annuity has been purchased will receive 75% of the annuity's cost. Thus, the entire cost of the annuity is not lost if the beneficiary passes away sooner than anticipated.

Another characteristic that can be included in care annuities is escalation. This raises the amount that the annuity pays out over time, either by a predetermined amount or by the Retail Price Index, which measures inflation. With care home fees rising annually, this can help defray some of the costs.

While care fees annuities typically offer higher income rates than pension annuities because they are targeted at older customers who are in poor health and are expected to pay out for fewer years, both capital protection and escalation can make care annuities more expensive.

What benefits and drawbacks can care annuities offer?

Benefits.

Long-term care expenses are typically covered, so you know what assets you can leave behind. You can ensure that your income increases in line with inflation to cover rising care costs. If someone lives a long life, they can offer excellent value for money. It lowers your estate's inheritance tax liability. Cons: You can rest easy knowing that you will continue to receive a regular income payment for the remainder of your life to help with their care expenses.

Care annuities do not guarantee that they will cover all of the costs of care; if they do, you will be responsible for paying the difference. Unless you have a care annuity that also increases with inflation, these costs may not be covered by the care plan. Once the care plan has been set up, it cannot be changed, cancelled, or cashed in at any time after the first 30 days. The total income payments from the care plan may be less than the purchase price, and may be significantly less if the person for whom it was purchased passes away soon after the plan's start. If the income is paid directly to a registered care provider, it is tax-free; however, if HMRC changes this tax treatment, or if the income is paid to a business or individual (such as a family member) other than a registered care provider, some of the income may be subject to tax; if it is paid to a regulated qualified adviser, that is an additional expense.

A care annuity: how much does it cost?

Because each policy is individually underwritten and its cost is determined by the policyholder's health and potential longevity, there are no set rates for care annuities.

However, as a general rule, the initial payment that you or your loved one makes to the annuity company for an immediate needs annuity may be three to four times the necessary yearly income. For instance, you might have to pay a lump sum of £160,000 to the annuity provider if your annual income for the care facility is £40,000 in addition to, say, £20,000 in state pension income and other pension income.

According to Kenny: "A financial advisor may be able to provide an estimate of the cost of a care annuity, but in the end, it depends on how the underwriters at the different insurers determine the applicant's life expectancy. The "

In April 2025, one care annuity provider, Just, calculated some sample premiums for care annuities (immediate needs) that would provide £20,000 annually for various ages, both with and without inflation-linking (escalation) as an add-on feature.

To refresh your memory, industry experts estimate that a year of residential care could cost roughly £66,000. Therefore, this £20,000 would need to be supplemented by other sources of income, such as the state pension and other private pension income. ).

Just Group and Advice on Care, April 2025.

Who offers care annuities?

At the moment, Just, Aviva, Legal & General, and National Friendly are the four companies that offer care annuities. British Friendly's impending entry into the market may be interpreted as a sign of the growing acceptance of care annuities.

How can an annuity for care fees be obtained?

The only way to obtain care annuities is through financial advisors.

According to Kenny, "this is because determining their suitability for various care situations is paramount." "A financial adviser who is accredited by the Society of Late Life Advisers is more likely to understand both this and the applicant's wider needs," he continued.

What are referred to as medically underwritten annuities are care annuities. Kenny clarified: "This means that after completing an application and speaking with the care provider and possibly the doctor, the required lump sum is determined by a life expectancy assessment.

The annuity provider will typically request medical reports from the care facility where the policyholder resides, if they are a resident, and from the general practitioner of the policyholder. Typically, Medicals Direct, a central organization, manages this by having patients fill out a medical questionnaire.

Annuities for care fees: are they worth it?

If the individual receiving care lives long enough to recover the premium, care fees annuities may offer good value. Additionally, they can provide two consolations: first, that the individual will not be solely dependent on state care, and second, that the expenses of care will not deplete all of your or a loved one's assets.

The state pension and private pensions can cover a portion of the care costs for the majority of self-funding residents of care homes, but they may need to supplement their income with savings or investments, which are frequently increased by the sale of a home.

Therefore, if, for instance, 48,000 of guaranteed income is needed annually to supplement income from the state pension and private pensions, and this can be obtained for a premium of, say, 200,000, any remaining assets are protected against care costs and may be used, invested, or donated.

Another use for a care annuity is to lower the size of a person's estate by the amount paid to purchase it, which will lower the inheritance tax that their loved ones may have to pay.

But, if a care annuity is taken out without capital protection and the person receiving care passes away sooner than anticipated, the money is lost. Alternatively, the care annuity's income might not be sufficient to cover the care costs if they increase.

A thorough and candid discussion with a certified financial advisorideally one who is SOLLA-accreditedis necessary to balance the possible advantages and disadvantages of a care annuity.