Source: Just Group, correct as of April 2025
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Paying for care later in life is something many of us put off thinking about – but with costs rising and local authority support limited, it’s an issue that can’t be ignored. A week in a care home can cost around £1,300, and for those who fund their own care, the bills can quickly eat into savings and assets.
One solution is a care annuity, which provides a guaranteed income for life to cover care fees. But how do these plans work, what do they cost, and are they worth it? This guide gives you the facts to help you decide.
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Care costs can be significant. A week in a residential home costs about £1,300 on average, but can be much more. That means most people will need to spend their savings and assets, with a risk of the money running out over time.
A report by retirement firm and care annuity provider Just found that three-quarters (73%) of over-45s said they had not thought about care, planned for it or spoken to family about it. Only 6% of people had put specific plans in place to cover the cost of care. And even among over-75s, just 7% had done so.
Stephen Lowe, group communications director at retirement specialist Just Group, says most people must find the money from a combination of pensions, savings, asset sales (often the home) and benefits. “All this tends to fall on the immediate family to organise, often at short notice.”
The problem for self-funders is that the cost of care is open-ended. About one in four (25%) self-funders run out of money, according to Just’s research, at which point they fall back on local authority support, which may not fund care of the same standard.
Care annuities – often called ‘immediate needs annuities’ or ‘care plans’ – are insurance policies that provide a guaranteed income for life to pay for long-term care costs. A lump sum of money is exchanged for a steady payment that reduces the risk of running out of money.
Lowe says: “They reduce the worries of older people and their families that the money for care might run out or that more of the estate than planned is eaten up by care costs.”
But they do come at a significant costs and have downsides of their own.
They work slightly differently to standard pension annuities.
The main differences between an immediate needs (or care) annuity and a standard pension (lifetime) annuity are:
We explain more here about how lifetime annuities work.
Care annuities work like this: in exchange for a one-off payment (premium), the care plan pays a guaranteed income for life. The income is tax-free if paid directly to the care provider.
The plan can be an immediate needs annuity (also known as an INA) where the income is paid from purchase, or a deferred annuity where the premium is lower but the income kicks in at an agreed time in the future. Both are funded by a one-off lump sum payment and are designed specifically for care fees.
Lucie Spencer, partner in financial planning at Evelyn Partners and a member of the Society of Later Life Advisers (SOLLA), explains that care annuities are what is known as ‘medically underwritten’. “This means the annuity provider will usually request medical reports from the GP of the person the annuity is for, and from the care home where they are resident. This is obtained through completion of a medical questionnaire and collated by a central company, Medicals Direct.”
When buying a care annuity, you can choose optional extras. One example is capital protection of a percentage of the initial sum paid out less payments already made. This is similar to an insurance policy within the annuity, so that if you die earlier than expected, your whole estate is not lost.
The maximum percentage is usually 75%. “This ensures the client's estate receives 75% of the initial annuity cost minus however much has already been paid out to cover care costs,” said Spencer. The higher the percentage you choose to protect, the higher the cost. Capital protection adds to the cost, so if you live longer, the overall expense will be higher.
Escalation can also be included in the plan. That means that the payments increase once a year, either by the Retail Price Index (RPI) measure of inflation, or by a fixed amount to keep up with rising costs.
But be aware that the more extras like these that you add on to the annuity, the higher the cost.
The cost of a care annuity will vary a lot from person to person, depending on their individual medical circumstances.
Care annuity provider Just has calculated the average upfront cost of a care annuity that pays an initial income of £20,000 each year.
Its calculations are based on the average health of a person entering a residential care home purchasing a Just care plan, in which conditions such as dementia, heart disease and stroke commonly feature.
| Age | Cost with 0% escalation | Cost with 5% escalation |
|---|---|---|
|
75 |
£99,202 |
£115,942 |
|
80 |
£92,984 |
£106,979 |
|
85 |
£81,762 |
£91,928 |
|
90 |
£66,576 |
£72,817 |
|
95 |
£50,237 |
£53,584 |
|
100 |
£43,829 |
£46,171 |
Source: Just Group, correct as of April 2025
An example situation where a care annuity might be considered, Lowe says, might be a woman aged around 88 in the early stages of a stay in a residential home.
“There are about twice as many women as men aged 90+ in the UK, so they are more likely to need care,” he pointed out.
“Although she has a dementia diagnosis, it is the interaction of this with other activities of daily living (ADLs) and health conditions that determines the premium of the care annuity,” Lowe says.
Just calculates that as an approximate example, to buy £48,000 of income to pay for care, with the amount increasing at 5% a year, the upfront cost would be about £200,000. If chosen to defer the income by two years (so paying for the care directly, without any annuity, for the first two years), this would reduce the premium to around £107,000.
Whether care annuities provide value for money is only ever known in hindsight, as it very much depends on how long someone will live for.
Spencer says: “They can provide peace of mind that not all an estate will be spent on care home fees. And that a client’s care home fees will be paid for the rest of their lifetime ensuring they are not forced to rely on state-paid care.”
A care annuity can also be used as an inheritance tax planning tool, as it will immediately reduce the size of the person's estate by the amount that is paid out to buy the annuity.
But they have downsides too, as outlined above. So it's very important you get full financial advice to explore all of the options on how to pay for care.
“This way you can see where the crossover point is between funding from investments or cash or purchasing an annuity, so individuals and their attorneys can make an informed choice,” says Spencer.
Advisers need to take additional qualifications to provide advice on care annuities due to the vulnerability of the clients and the unique features of them. There is also The Society of Later Life Advisers (SOLLA), which has an accreditation for financial advisers who wish to specialise in this area.
Care annuities are intended for people who already have a care need at the time of buying one.
A care annuity can only be arranged through a specialist, regulated financial adviser. Insurance companies will not provide the quotations to anyone who is not accredited to provide the advice.
There are four UK providers offering care annuities:
“These four companies are also named on the medical information form to obtain the quotation. Any other company other than these four are not reputable and cannot offer care annuities,” says Spencer, from Evelyn Partners.
The adviser will need to talk to the client, or their representative if the person does not have legal capacity to make the decision (for example if they have dementia). They will discuss the type of care they currently and are likely to need, and their medical history. Then the adviser will complete a form called a ‘Care Fees Plan Questionnaire’.
Lowe (from the provider Just) says: “The questionnaire collects information on their medical history and activities of daily living (ADLs) which cover how well they can undertake tasks such as bathing, dressing and eating. Providers use the information, together with other data to calculate the premium.”
The questionnaire is sent to a specialist third-party medical data gatherer, which will either interview the current care provider, such as the care home, or request a GP report.
The resulting medical pack is then shared with care annuity providers, who underwrite and issue an adviser quote pack via email, which contains key facts, an acceptance form and a care provider declaration.
There is usually a 30-day cooling-off period, but after that you can’t change your mind.
A care annuity is a big decision. So it’s important to consider the options carefully. Read more about preparing for future care costs.
Provided by HUB Financial Solutions Limited
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