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Should I buy an Immediate Needs Annuity to pay for care?

Should I Buy An Immediate Needs Annuity?

We often get asked this. Immediate need annuities (also referred to as Care Fee Annuities) offer a very safe, secure and tax-efficient way to fund care, but whether you might wish to buy one will, in our experience come down to:

  • The amount of money you have available? – if you have considerable money and feel care may not be required for too long, it might be cheaper to continue funding care directly from savings.  However, if the amount of money you have means you have an Inheritance Tax Liability, you may still like an annuity because any premium paid will immediately reduce your liable estate and therefore reduce or even avoid any IHT.
  • Whether you qualify for state funding? If so and you would be happy with the type of care this would provide, there would be no point in considering an annuity.
  • Whether you place more importance on giving your parent or relative the best possible care and peace of mind that money will never run out? – If so, then yes, the guaranteed lifetime income an annuity provides could be well be worth considering
  • Whether you want to avoid having to personally pay for your parent’s care should their money otherwise run out?
  • The cost of any annuity.
  • The relative advantages and disadvantages of annuities.

To help, here are just some of the pros and cons you may like to consider:-

Pros and Cons of Buying an Immediate Needs Annuity

Reasons why you might prefer to use an Immediate needs annuity to pay for care:-

  • An immediate needs annuity only requires one single premium

    No regular premiums are due, meaning it helps cap the future cost of care.

  • Once set up you should have no worries that money will run out

    As it guarantees regular income for the rest of the person needing care’s life, no matter how long the person needs care.

  • Immediate need annuities offer a hassle-free way of paying for care

    Once set up there no ongoing need to manage and make regular decisions over investments, or worry about stock market crashes.

  • The annuity is portable

    So it doesn’t matter if the person needing care changes care providers, the annuity can move with them and help pay any new care provider’s fees.

  • Immediate need annuity income is TAX FREE

    Providing it is paid to the care provider and they are registered with Care Quality Commission and the annuity income doesn’t exceed the care cost,
    the income provided is tax free

  • Care homes like them as they guarantee funding

    And avoids them otherwise having difficult conversations with families over asking families to move parents when money runs out

  • Immediate need annuities can be equally used to pay for care at home or in a care home

    And offers greater choice over care received.

  • Gives you complete control and choice of care

    Avoiding bureaucratic dealings with Local Authorities.

  • They are totally secure

    All immediate need annuities arranged by us are covered by the Financial Services Compensation Scheme (FSCS) with no upper limit – unlike most investments which do have a maximum compensation limit.

Reasons why you might not want to consider an Immediate needs annuity:-

  • Once purchased they can’t be surrendered or encashed

  • Premiums are based on how long insurers feel the person in need of care will live so any premature demise will mean some loss of premium

    Although some providers offer some limited free premium protection against death in the first 6 months and with all providers, you can pay a little more to buy longer premium protection.

  • Premiums can be expensive

    But this will depend on age, health and the amount of benefit you need it to provide. If the best premium would use up most of any available savings, you may not want to consider buying an annuity.

Should I Buy An Immediate Needs Annuity Which Covers The Full Cost Of Care?

Whilst an annuity providing the full cost of care (and not just the shortfall) will provide greater future proofing against escalating fees, or need for any greater care in the future, as:

  • The premium would be more expensive and would increase any loss in the event of only needing care for a short period.
  • You would still receive any State Pension and any non-means tested State Benefits (including Attendance Allowance, Disability Living Allowance or Personal Independence Payments) which could be put towards your fees.
  • The income plus any escalation could become greater than the cost of care when any excess would become taxable,

we would normally only suggest buying an annuity which covers the shortfall you have in income rather than the full cost of care. 

You can quickly check any entitlement to State Benefits and see how much shortfall you have, by using our shortfall calculator.

Once you know what the shortfall is, providing the person needing care is over 80, you can also get an immediate idea of how much an annuity MIGHT cost by using our instant estimator.

What Tax Advantages does an Immediate Needs Annuity Offer?

Immediate needs annuity are a very tax-efficient method of paying for care, as in most cases they will provide tax-free income and for those liable for Inheritance Tax – they can also minimise or even potentially eliminate any Inheritance Tax.

Income Tax – Providing the annuity income is paid to a Care Quality Commission (or Care Inspectorate in Scotland or Wales) registered care provider whether a care agency providing care in your own home, or a care home, AND the income it pays does not exceed the total cost of care, the income is currently paid tax-free.  

Should you employ a non-registered carer OR qualify for free NHS Continuing Healthcare when you would no longer need to pay for your care, although the income would continue to be paid, it would be paid into your bank account when it would be taxed at your highest marginal rate. However, even then, only a small proportion of the payments would be taxed because the vast majority of any regular payment will be your own money being returned to you (the premium paid) and under current rules (2025-6) this is not taxed.

Reducing or Eliminating Inheritance Tax – As the premium paid will immediately reduce the amount of money you or the person needing care will have, it also reduces any  Inheritance Tax liability.  

Please Remember: Both Income and Inheritance Tax rules are liable to change.

Should you buy an Immediate Needs Annuity or Pay as you go?

An immediate needs annuity will not be right for everyone.

After fully understanding your circumstances, and getting exact annuity quotes for you, your adviser will assess each option with you and only recommend an annuity if it is right for you.

Immediate Needs Annuity Explained

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