What is a care fees annuity and how much does it cost?

A care fees annuity, also known as an immediate needs annuity, is a type of insurance policy to pay for care costs. In exchange for a one off lump sum from the person who needs care, or their family, the care fees annuity pays out a regular monthly amount to cover the cost of providing that care.

Care costs can be much higher than expected – most of us are wildly out when it comes to estimates of just how expensive. As many as 85% of those who had previously helped find care for a loved one were shocked at the cost, according to research for the Just Group Care Report 2025.

More than half (60%) of over 45s quizzed in the Just survey thought the cost of a year’s residential care was less than £60,000, significantly lower than industry estimates for self-funders of £66,456.

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Worryingly, more than three in 10 (31%) expected the cost would only be up to £30,000 a year, less than half the true figure.

With an estimated four in five people aged 65 and over likely to require some level of care before they die, according to the 2025 House of Commons Committee Report on Adult Social Care Reform, millions of families are sleepwalking towards a nasty shock.

Care fees annuities are one potential answer to the problem of paying for care, though they come with their own costs. We weigh up the benefits and risks.

What is a care annuity?

Care annuities, sometimes called ‘care plans’ or ‘immediate needs annuities’, are a type of insurance policies to pay for care costs, either at home or in residential care.

Mel Kenny, chartered financial planner at Radcliffe & Newlands Wealth and an adviser accredited with the Society of Later Life Advisers (SOLLA), explained: “In exchange for a lump sum, an insurer provides a guaranteed income for the rest of the care resident’s life. Care annuities can also help pay for home care.”

The size of the lump sum required to buy a care annuity is based on individual circumstances, closely linked to the person’s current health and wellbeing and how long they might be expected to live.

Payments made from a care fees annuity are exempt from income tax when paid to a UK registered care provider, either a care home or for care provided at home. This compares to payments from a regular annuity, which are taxable.

They also differ from a regular pension annuity because care fees annuities are not bought using money held within a pension, they are bought using the customer’s own money – savings, investments, or proceeds of a house sale, for example. Though overall payment for care is often made through a mixture of pension income, state pension and other sources, including potentially a care annuity.

Are all care annuities the same?

Care annuities are not all the same, so you’ll need to consider carefully which type is best for you or your loved one.

With an immediate needs care annuity, the income is paid out beginning from the point the annuity is purchased. There is also a deferred care annuity option, where the premium is lower but the income begins at an agreed time in the future.

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 example, you can choose to protect up to 75% of the initial sum paid out. This means, the estate of the person for whom the care annuity has been bought will get 75% of the cost of the annuity, minus however much has already been paid out to cover care costs. So if the person for whom the annuity was bought dies earlier than expected, the cost of the annuity is not all lost.

There is also another feature, known as ‘escalation’ that can be factored into care annuities. This increases the amount paid out by the annuity over time, either by the Retail Price Index measure of inflation or by a fixed amount. This can be helpful to cover the cost of care homes where fees increase each year.

Both capital protection and escalation can make care annuities more costly – although care fees annuities tend to offer better rates of income than pension annuities as they are aimed at older customers in ill health, with the expectation being the annuity will pay out for fewer years.

What are the pros and cons of care annuities?

Pros

• You usually know the costs of long-term care will be met
• Lowers the risk of your estate being eroded by future care costs, so you know what assets you will be able to pass on
• You can make sure the income rises with inflation to cover increases in care costs
• If an individual lives a long life then they can provide great value for money
• Reduces an estate for inheritance tax
• Peace of mind that a regular income payment will be paid for the rest of your life to help towards their care costs

Cons

• Care annuities don’t guarantee to cover the full costs of care – if the cost of care exceeds the income from the plan you will be responsible for paying the difference
• Care costs will rise with inflation – unless you have a care annuity that also rises with inflation, these costs may not be covered by the care plan
• Once the care plan has been set up, it can’t 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 considerably less if the person it was bought for dies shortly after the start of their plan
• If the income is paid directly to a registered care provider, the income is tax-free – if this tax treatment is changed by HMRC or the income is paid to a company or person (like a family member) other than a registered care provider, some of the income may be subject to tax
• Can only be taken out through a regulated qualified adviser so that’s an extra cost

How much does a care annuity cost?

The cost of a care annuity is very specific to the individual, based on their health and how long they might live – each policy is individually underwritten so there are no ‘standard’ rates.

But as a rough guide, the premium on an immediate needs annuity – the lump sum you or your loved one hands over to the annuity company – might be three to four times the annual income required. So if the income you need to pay for the care home is £40,000 a year – on top of, say £20,000 of state pension income and other pension income, for example – you could need to pay a lump sum to the annuity provider of £160,000.

Kenny said: “A financial adviser might be able to give an indication of how much a care annuity might cost, but ultimately it depends on how the underwriters at the various insurers assess the applicant’s life expectancy.”

One care annuity provider, Just, crunched some example numbers back in April 2025 as to what typical care annuity (immediate needs) premiums might be to provide £20,000 a year for different ages, with and without inflation-linking (‘escalation’) as an add-on feature.

(As a reminder, industry experts say a year’s residential care could cost around £66,000 – so this £20,000 would need to be topped up with other income like the state pension and other private pension income.)

Source: Just Group, April 2025 and Advice on Care

Who provides care annuities?

There are currently four providers of care annuities – Just, Aviva, Legal & General and National Friendly. British Friendly are about to enter the market, which can be taken as an indication of the increasing popularity of care annuities.

How do you get a care fees annuity?

Care annuities can only be taken out through financial advisers.

“This is because assessing the suitability of them for different care situations is paramount,” said Kenny. “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 added.

Care annuities are what is known as ‘medically underwritten’. Kenny explained: “This means the lump sum required is based on an assessment of life expectancy, following the completion of an application form, a consultation with the care provider and perhaps the doctor.”

Medical reports – from the GP of the person the annuity is for and from the care home where they are resident, if they are a resident – will usually be requested by the annuity provider. A central company, Medicals Direct, usually handles this via the completion of a medical questionnaire.

Are care fees annuities worth it?

Care fees annuities can provide good value for money if the person for whom care is being provided lives long enough to recoup the premium. They can also give two-fold peace of mind; firstly that the person will not have to rely on state care alone, and secondly that not all of your assets, or a loved ones’ assets, will be eaten up in care costs.

Most self-funding care home residents can use the state pension and private pensions to meet some of their care costs but may need to top-up by accessing savings or investments, often boosted by the sale of a home.

So if, for example, £48,000 of guaranteed income is required each year to top up income from the state pension and private pensions, and this can be secured for a premium of say £200,000, then once this initial premium is paid, any remaining assets are protected against care costs and could be spent, invested or given away.

A care annuity can also be used as a way to reduce the size of a person’s estate by the amount used to buy the care annuity – and therefore reduce the inheritance tax bill their loved ones may have to pay.

However if a care annuity is taken out without capital protection and the person being cared for dies earlier than expected, that money is lost. Or if the care costs spiral, the income provided by the care annuity may not be enough to cover it.

A full and frank conversation with a qualified financial adviser – ideally one accredited with SOLLA – is essential to weigh up the potential costs and benefits of a care annuity.