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The Independent
28-05-2025
- Business
- The Independent
How your pension salary sacrifice works - and what HMRC tax changes would cost you
The publication of government research undertaken by HMRC around changes to workplace pensions has caused a stir, with the suggestion that the salary sacrifice scheme used by many working people in the UK might be set for an overhaul. This research questioned how businesses felt about prospective changes which would see pension contributions subject to income tax and National Insurance payments, resulting in an annual cost of up to £560 for employees and £241 for employers, based on an average £35,000 salary. Presently, most workers are auto-enrolled into saving into their pension automatically, though there are different thresholds, methods and benefits around this. The principle attraction here is that the money is taken from salaries to go into pensions pre-tax, giving relief to the rate of each person's tax band. HMRC's survey of more than 50 companies, commissioned under the previous government but only released by HMRC now, showed that most viewed the proposals for change negatively - though the Treasury has dismissed suggestion of impending alterations as 'totally speculative' and said all areas of tax are 'regularly' subject to research. 'This is a private HM Revenue & Customs consultation initiated in 2023 and it's far from certain that the Treasury has any intentions around salary sacrifice, but it's not the first time that it has come under the spotlight as a potential area for shoring up the tax take,' Gary Smith, financial planning partner at Evelyn Partners, explained to The Independent. Difference between DB and DC Defined benefit (DB) schemes are most frequently seen in the public sector and offer a set, guaranteed amount of income in retirement. They can be on a final salary basis or a career average, with employers funding it. Defined contribution (DC) schemes are much more common and many workplaces use them for auto-enrolled employees. Here, your eventual pension amount depends on how much has been put in across your working life, plus the returns earned on that invested money by pension providers. As such, they can vary wildly in value and even in terms of timing when is best to access them, depending on external factors like the stock market. Employee and employer pay in at least eight per cent combined, though many employers may pay in more than their minimum three per cent to match an employee's contributions. Boosting contributions to workplace pensions A crucial tool workers have in ensuring they have enough to fund their retirement is to up their own pension contributions across the years. Adding slightly more if you get a raise, for example, can have a material impact later down the line. And if you're able to comfortably reduce your immediate income, checking your workplace options to see if you or your employer contributes more is another way to make sure future you is facing a bigger retirement pot. Salary sacrifice it is not limited to just pension contributions. Childcare vouchers, vehicles or other benefits can come under salary sacrifice schemes. HMRC proposals and what they would mean for you It's important to note that the research published is not something imminently coming into force, or that any changes might occur at all right now. But pensions are subject to change - it's only a little over a decade since auto-enrolment came into force, remember. Changes such as these researched ones might have a massive impact though, not just in what you're left with decades down the line, but whether companies would even operate it any further. 'Salary sacrifice (SS) is a very efficient and effective way for employees to save into pensions, and it seems inevitable that watering it down – or dismantling it altogether - would hit pension saving, not just because the tax incentive would be diluted but also because faith in the pension system would be dented by more Government interference,' added Evelyn's Mr Smith. 'After the Chancellor's Budget statement, when she announced an increase to employers' National Insurance from April 2025, salary sacrifice arrangements for workplace pension schemes became more attractive for many employers, because of potential NI savings. If SS reform were to be seriously considered, employers who have introduced or started to introduce SS will be wondering which way to turn. 'Making pension contributions via salary or bonus sacrifice is a popular option for those whose earnings might fall into the 60% tax trap, a zone between £100k and £125,140 where the combination of high-rate tax and a tapered reduction in their tax-free personal allowance leads to a highly punitive effective income tax rate of 60%, which for many families is worsened by the withdrawal of child-care benefits. 'The fault here lies with an unfairly structured income tax and benefits system that penalises people in this situation disproportionately for increasing their earnings. Removing a perfectly legitimate mitigation strategy - increasing pension contributions via SS - would seem harsh without reforming the disincentivising tax step itself.'
Daily Mail
28-05-2025
- Business
- Daily Mail
I'm 80 and want to move in with my son and his family, will it create a tax trap?
My wife and I are 80. What are the tax implications and pitfalls, if we sell our house and buy another jointly with my son and his family in order to live together? What can we do to mitigate these? A.S, via email SCROLL DOWN TO ASK YOUR FINANCIAL PLANNING QUESTION Harvey Dorset, of This is Money, replies: Moving in with family can help people see enjoy their later years in comfort, with the help they need along the way from loved ones. Having grandparents on hand can also be a vital help for working parents too. Intergenerational living won't be without its tricky moments but it is a great way to spend precious years together as a family and see more of your grandchildren. It also allows families to pool their financial resources and potentially get a home, space or location, that they might not be able to alone. You are right to check up on the tax implications though, as this kind of joint ownership can have an impact on everything from stamp duty to inheritance tax. You don't state how much your existing home is worth or what the new one will cost. The financial advisers we spoke to explained this will make a difference to whether you need to worry about inheritance tax and how complicated things may be. Ian Dyall, head of estate planning at Evelyn Partners, replies: The two taxes you need to be aware of are inheritance tax and a form of income tax called 'pre-owned asset tax', which was introduced in 2005 as an anti-avoidance measure to target people who were managing to sidestep the inheritance tax rules. Let's talk about the principles of inheritance tax first and then we can apply it to your case. If you reduce the value of your estate by making an outright gift, that will only be effective in reducing your inheritance tax liability if there is no 'reservation of benefit'. You also generally need to survive the gift by seven years before it ceases to be included in your estate unless it is covered by one of the exemptions. A reservation of benefit occurs where you continue to use or benefit from an asset that you have given away, for example giving away a property but continuing to live in it. In your case, whether there is a deemed lifetime gift for inheritance tax will depend on who pays for the new property and how it is owned. If you take the proceeds of your current home and use it to help purchase the new property, but the property is owned solely by your son and his wife, then a gift has happened for inheritance tax purposes. However, if you then live in that property rent-free, it is likely to be treated as a reservation of benefit for inheritance tax purposes. The value would remain in your estate and will be liable to IHT on death, irrespective of how long you live after making the gift. If the new property is co-owned with your son in proportion to how much each of you have contributed, then there would be no gift and only your share of the property would be liable to inheritance tax on your death. If the property were solely owned by your son and his wife, you could avoid the reservation of benefit by paying a market rent for your use of part of the property. You would need to get a professional to determine a fair rental value of your use of part of the property, and your son would be liable to income tax on the rent, but in some cases that may be worth paying if you think you are likely to live seven years but not an excessive period beyond that. If you no longer own a share of a property on death, you may be worried that you will lose the 'residence nil rate band', which is an inheritance tax allowance that can be used if you leave your home to your children and grandchildren on death. However, 'downsizing provisions' exist to allow people to downsize or sell their home later in life without losing the allowance, so you should not lose any of the allowance that you would have been entitled to. Make sure you get ownership set up properly Patrick Haines, partner at Partners Wealth Management, replies: There should be no tax issues (other than potentially stamp duty) on the planned move to the new 'family home'. For inheritance tax purposes, you may have available a tax-free nil rate band each of up to £325,000 and an additional tax-free residence nil rate band each of up to £175,000 (certain conditions apply to the latter). This can provide a tax-free estate of up to £1million. Where your estate is valued within the above limit, there may potentially be no inheritance tax due on your estate on the last to die and your son and family could ordinarily live with you in the meantime without any tax implications. A properly drafted will should be arranged. For larger estates, inheritance tax is usually payable at 40 per cent on your estate in excess of these allowances. In this case, there are further considerations and these relate to how the property is legally owned from outset and also your life expectancy. To meet your objectives, the ownership of the property in this case could be arranged as tenants-in-common where you will typically own 50 per cent and your son would own the other 50 per cent. We would recommend an equivalent sharing of the running costs as well. You could then take advantage of a co-ownership discount, which HMRC permits where the co-owner is not a spouse or civil partner. Your son can remain in occupancy for a discount to apply. On the successful application following the death of the 50 per cent co-owners, a discount of up to 15 per cent of the value of the deceased's share can be applied. The other 50 per cent owners would continue to own their share. In our example, if you as parents pass away within seven years, the 50 per cent share you have given to your son on the purchase of the new property would fall back into your estate. Where the total estate value exceeds the available nil rate bands, then inheritance tax may be due on the excess. The gift to your son of the 50 per cent share is called a potentially exempt transfer (PET) and this gift will fall outside your estate for inheritance tax if you survive a seven-year period. For 'failed PETs' where the 50 per cent gift to your son is in excess of the available nil rate bands of £325,000 each, taper relief may apply to the excess which can reduce the tax payable. Be mindful that the inheritance tax on any failed gifts might need to be met by the beneficiaries. Inheritance tax on jointly owned property is rarely straightforward and whether or not tax has to be paid will depend on several factors, including the status of the person inheriting and their relationship with the deceased, how the property was jointly owned, the type of the property concerned and details of occupancy. Caution: tax planning around the main residence and joint property ownership can be fraught with danger, particularly where circumstances change or relationships deteriorate so professional legal advice from a qualified solicitor is strongly recommended. Help with financial advice and planning Financial planning can help you grow your wealth, sort your pension, or make sure your finances are as tax efficient as possible. A key driver for many people is investing for or in retirement and inheritance tax planning. If you are looking for help sorting your finances and want to work out whether you need advice, planning, or coaching, the following links can help you understand more: >Do you need financial planning or financial advice - and is it worth it? > Financial advice: What to ask and how much it might cost > Are you retirement ready? Take our quiz and get financial planning help > Inheritance tax planning - what you need to know to protect your wealth What is pre-owned asset tax? Ian Dyall adds: If you sell your property and give the cash to your son who uses the money to buy a property in his name, which you then live in, there is an argument that the reservation of benefit rules do not apply. In this case you could be liable to pre-owned asset tax. This is an income tax charge paid annually on the perceived value of your occupation of the property. You can avoid it by electing to have your contribution towards the property treated as a reservation of benefit, or again by paying a market rent. Its application is complex and it is easy to unwittingly fall within the scope of the tax through actions driven by motives unrelated to tax planning. The bulk of UK wealth is held in people's homes, so successive governments have made it difficult to mitigate the inheritance tax liability on your main residence, introducing new legislation to block loopholes when necessary. If your share of the new property is worth less than the proceeds from your existing home, then planning with the funds you have released by downsizing may be the simplest approach to mitigating inheritance tax. Get your financial planning question answered Financial planning can help you grow your wealth and ensure your finances are as tax efficient as possible. A key driver for many people is investing for or in retirement, tax planning and inheritance. If you have a financial planning or advice question, our experts can help answer it. Email: financialplanning@ Please include as many details as possible in your question in order for us to respond in-depth.
Yahoo
19-05-2025
- Business
- Yahoo
Workers turn down £100k salaries to avoid tax trap
Higher earners are working four-day weeks, stuffing their pensions and taking more holidays to avoid tax 'cliff edges'. New data suggests more workers are deliberately limiting their salary growth in order to avoid tax traps that kick in at certain income thresholds. The number of taxpayers earning just below £100,000 has soared by 60pc in five years to hit 117,000, according to a Freedom of Information request seen by The Times. Meanwhile, the number of taxpayers earning just below the higher-rate tax band of £50,271 has hit nearly one million, an increase of 50pc. Robert Salter, of accountancy firm Blick Rothenberg, said taxpayers were saving more into their pensions while others were reducing their hours by working four-day weeks or taking an extra 10 or 15 days of annual leave per year. He said he had also seen employers providing workers with electric cars as part of a salary sacrifice arrangement. 'Rather than paying someone say £105,000 cash in a tax year, it might be better to offer them a salary of £95,000 and a Tesla or similar e-car.' Economists have warned that cliff edges in the tax system undermine Rachel Reeves's mission to drive economic growth. Even a small pay rise can lead to a significant tax rise or the loss of valuable benefits for workers who cross certain earnings thresholds, thereby incentivising workers to cut their hours or turn down opportunities. For example workers lose their personal allowance of £12,570 at a rate of £1 per every £2 once they earn over £100,000 a year. This creates an effective 60pc tax trap on income of between £100,000 and £125,140. On top of this, parents earning over £100,000 can miss out on thousands of pounds worth of childcare support due to the removal of free childcare. Mr Salter said: 'If you earn £1 above the £100,000 threshold and are presently getting free childcare, you lose that benefit fully – so in effect, it is akin to a 100pc tax charge.' Lucie Spencer, of wealth manager Evelyn Partners, said she regularly spoke to clients about keeping their taxable income below the 40pc, 45pc and 60pc threshold – as well as the £60,000 band at which entitlement to child benefit is gradually eroded. The Government starts to claw back child benefit where one parent earns more than £60,000 before it is then withdrawn completely from £80,000. Ms Spencer said: 'Making additional pension contributions is one option available. You can pay up to £60,000 per year into a pension and can carry forward unused allowances in previous years. She continued: 'Salary sacrifice can also be used to purchase other non-cash benefits such as cycle to work schemes, low emissions cars, or childcare vouchers.' Nimesh Shah, also of accountancy firm Blick Rothenberg, said tax cliff edges had become a bigger problem in recent years due to the freeze on tax thresholds and wage inflation. A phenomenon known as 'fiscal drag' means that four million of workers will be dragged into paying the 40pc or 45pc rate by 2027-2028, according to estimates by the Office for Budget Responsibility. Mr Shah said: 'Earning £100,000 is quite a milestone for someone, but the higher tax burden makes it increasingly less attractive. 'I think there is a sentiment now that frozen thresholds are killing the aspiration of workers.' Rachel Reeves has vowed to end the freeze in 2028 by raising income tax thresholds in line with inflation. But there are growing concerns the Chancellor could be forced to extend the freeze in order to help plug a multibillion-pound hole in the public finances. Sign in to access your portfolio
Daily Mail
19-05-2025
- Business
- Daily Mail
EXCLUSIVE Could you fall into the pension inheritance tax trap? We reveal how four families could face huge bills
Inheritance tax has historically been something only the very wealthiest pay, but we can reveal the huge tax bills families could be saddled with by 2030 thanks to a looming raid on pensions. Frozen thresholds combined with rising asset prices, including the value of homes, investments and savings, are already dragging more into death duties. But a massive change to how estates are calculated is on the cards, with pension pots due to be included from 2027 - and this will bring far more families into the inheritance tax net and drive up their bills. Some families will end up paying tens or even hundreds of thousands of pounds more in inheritance tax. To illustrate the impact, exclusive figures for This is Money from wealth management firm Evelyn Partners show how four example families who would currently have small, or in one case no inheritance tax liability, could instead face hefty tax bills by 2030. We look at what an IHT bill will cost now and what it is likely to increase to within five years, once changes have filtered through. Ian Dyall, head of estate planning at Evelyn Partners says: 'These imaginary but realistic case studies illustrate the inheritance tax liability impact of both asset value inflation against nil-rate bands that are frozen until at least 2030, and crucially the pensions rule change that is due to come into force at the start of the 2027/28 tax year.' Currently, unspent pension pots are considered outside of people's estates for inheritance tax purposes. But from April 2027, the Government wants to include them under plans announced by Rachel Reeves in her Autumn Budget. This could potentially lead to double taxation and rates as high as 67 per cent on unspent pots. This is due to current income tax rules on inherited pensions that differ depending on the age at which someone dies. If you die before age 75, the beneficiaries of your pension can take the pot free of income tax. But if you die after the age, beneficiaries pay income tax on withdrawals from inherited pensions. Adding inheritance tax at 40 per cent to the latter case too, would lead to double taxation and sky-high marginal rates on withdrawals. It's likely that one in 10 estates will soon be in the IHT net - with the Treasury forecast to rake in £14.3billion extra between now and the 2029-30 tax year. Below, we lay out four hypothetical scenarios to illustrate how the inclusion of pensions for IHT purposes will create financial headaches for many families. Inheritance tax: How it works Inheritance tax is levied at 40 per cent on estates above a certain size. Your estate is the term given to all the things that you own at death. Valuing this involves adding up everything, from your stake in your home, to your savings and investments, your car and your personal belongings. As an individual, your estate needs to be worth more than £325,000 for your loved ones to have to stump up inheritance tax. This can be doubled to £650,000, jointly, for married couples or civil partners, who have not already used up any of their individual allowances. A further crucial allowance, the residence nil rate band, increases the threshold by £175,000 each for those who leave their home to direct descendants. This gives a total potential extra boost of £350,000 and creates a potential maximum joint inheritance tax-free total of £1million. But the own home allowance starts being removed once an estate reaches £2million, at a rate of £1 for every £2 above the threshold. > Essential guide: How inheritance tax works Four families and how they could be hit for IHT Our table highlights the four example families, with their inheritance tax position now and the situation they could find themselves in from 2030. The blue line in the table represents their assets and the total value of their estate now, while the green line shows this in 2030 after assets have risen in value and pension pots have been included. The column stating Taxable Estate shows how much of it would incur inheritance tax now and in 2030 once pension pots are included (the Smiths negative figure shows they currently are below the inheritance tax level). The IHT Due column shows the tax bill now in blue and the future potential tax bill in green. We explain the scenarios in more detail below. Scenario one: The Smiths, late 30s A couple in their late 30s with a young family might not be considering inheritance tax as an issue at this stage of their lives. But it's important to remember that, however morbid the thoughts involved, families can be left with a huge tax bill at any age if disaster strikes. Often people don't think about IHT until it's too late and little can be done to mitigate the potentially hefty charge, so those who could be pushed over the limit should seek advice, whatever their age. Our figures from Evelyn Partners show how the children of a couple in their late 30s, who would not have to pay IHT if their parents both died today, could face a hefty bill in five years. In our scenario, the Smiths' own a £750,000 house, with £400,000 left on their mortgage and £500,000 in defined contribution pensions between them, with both contributing £500 a month. They have also saved £50,000 into their Isa and £20,000 in cash. This means their total assets add up to £1,320,000, but their estate is valued at £420,000 after deducting mortgage debt (£400,000) and their combined pension pots of £500,000. Under the current IHT rules, this couple are well within their combined £1million nil rate band and residence nil rate band allowances, with £580,000 to spare, which means their estate wouldn't face any inheritance tax. Looking to the future, Evelyn Partners assumed the assets appreciate by 5 per cent a year, except cash savings, which increase by 2.5 per cent annually. Their mortgage will reduce as repayments continue and their pensions grow due to investment returns and contributions. This means the family's home would be worth £962,520 in 2030, while their repayment mortgage would have been paid down to £300,000, and their pension pots would be worth a combined £709,685. Their Isa and savings pots will have increased to £64,168 and £22,660, respectively, assuming no further contributions between now and 2030. The Government's plan to pull pensions into inheritance tax, along with growth in the family's assets, radically change their IHT position. By 2030, their estate has more than tripled to £1,459,033, once their £300,000 mortgage debt is deducted. This leaves £459,033 of their estate above the inheritance tax-free allowances, meaning that they could owe £183,613 in IHT. Scenario two: The Murrays, mid-50s Our second couple are the Murrays, who are in their 50s with grown-up children. They're wealthier than the Smiths, with a more valuable home and bigger combined pension pots. Their £1million home (£900,000 of which is mortgage-free) and £1million in pension pots, plus £100,000 in Isas and £50,000 in cash, bring their total assets to £2,150,000. Today, inheritance tax isn't a major concern as they are just over the limit. Deducting their mortgage debt and pension pots brings their total estate to £1,050,000, with their taxable estate at £50,000 after the IHT allowances. This means this £50,000 chunk of their estate would currently be liable to a 40 per cent IHT bill of £20,000, because their pension pots are not included. However, in five years, this family could face an inheritance tax charge of more than £800,000, primarily because of the pensions raid, along with fiscal drag from frozen thresholds. Assuming this family's assets had appreciated by 5 per cent annually, with cash savings up 2.5 per cent each year, and their mortgage now fully paid off, their total assets would be £2,846,914. As the couple's combined estate exceeds £2.7million, on the second death the residential nil rate band benefit would be fully tapered away. With this gone their inheritance tax-free allowance is only £650,000 rather than £1million. Their taxable estate in 2030 could now be £2,196,915, rather than the current £50,000, leaving their beneficiaries with a bill of £878,766. Scenario three: The Taylors, late 60s The Taylors are a retired couple in their late 60s with total assets of £2,650,000. They live in a large detached home in the South East that is worth £1.25million and they cleared the mortgage on it some time ago. Many of their generation had defined benefit pensions, which are lost on the second spouse's death, but the Taylors built up defined contribution pensions instead and have combined pots worth £1.25million. Alongside, this they have £100,000 in Isas and £50,000 saved in cash. Their £1,250,000 combined pension pots are currently exempt, which means that their estate is worth £1,400,000, with a taxable estate above the IHT threshold of £400,000. This leaves their adult children - they have no grandchildren - with a £160,000 inheritance tax bill if they were both to die today. However, by 2030, their estate could be worth £3,004,200, assuming their pensions and savings maintain their monetary value as they draw on them. If both of the Taylors died in 2030 they would still be under the age of 75, which means that their pension funds will not be liable to income tax when their beneficiaries withdraw funds. But their pension pots will now be included for inheritance tax purposes. Like our couple in their 50s, they only qualify for the £650,000 nil rate band and not the residence nil rate band because their estate is now valued at over £2.7million. This means that their taxable estate is £2,354,200 with an IHT bill of £931,680. Scenario four: The Joneses, over 75 Our last retired couple are in a similar financial position to our previous family, the Taylors, but by 2030 will be over the age of 75. This means their pension beneficiaries - their adult children and grandchildren - will have to pay income tax at their marginal rate, if they withdraw funds from the inherited pots. While their £1,500,000 house will have increased in value to nearly £2,000,000, we assume their pensions, investments and savings have now been reduced. However, growth in their home's value along with adding the remaining pension pots, means their total estate for IHT purposes will have increased from £1,650,000 to £3,035,040. Currently, their taxable estate above the combined £1million inheritance tax threshold is £650,000 with a tax bill of £260,000. In 2030, the value of their estate, now including the remaining pension, will have exceeded the amount that allows the family to claim the residence nil rate band. This means that their taxable estate will soar to £2,385,040 with the beneficiaries left liable to pay £954,016 in IHT. But there is a double whammy, as they die after the age of 75, their beneficiaries will face inheritance tax on their pension pot - and pay income tax on withdrawals. Ian Dyall says: 'This means that on the £600,000 of inherited defined contribution pension cash remaining after £400,000 IHT has been removed, the beneficiaries – if higher rate taxpayers – could have to pay a further 40 per cent or £240,000 in income tax, leaving just £360,000 from a £1million pension pot. 'However, one thing in this family's favour is that the elderly parents have spent (and/or possibly gifted) some of their savings, Isa and pensions, thus limiting the IHT liability at death, leaving it only marginally greater than the third family. How can you lower your pension raid IHT bill? These case studies show how quickly families will be hit with a huge IHT liability once pensions are included within people's estates. The seven-year rule on gifts, after which they pass out of your estate for IHT purposes, has not yet been changed, so gifting can be one way to lower your bill. Dyall says: 'Our case studies also illustrate the potential power of spending or gifting savings to limit an IHT liability, particularly in a situation where unspent pension pots are subject to IHT. You can gift £3,000 a year, plus unlimited small gifts of £250, free from IHT, and spouses and civil partners can give each other any sum tax-free. Gifts can be made beyond this but the person making them must survive seven years for them to fully come out of the inheritance tax net, tax would be incurred on a sliding scale in the meantime. There is also an inheritance tax exemption for regular gifts made out of surplus income, which some may consider. Record keeping and proper research is vital here. Dyall says that spending more of their pension could prove to be a wise move for many, who could otherwise face big bills. 'That is not to say of course that elderly savers with unspent pension assets should start to withdraw suddenly and splurge,' says Dyall. 'Everyone will sensibly want to make sure they retain access to enough funds to have a comfortable retirement and to pay for social or residential care if it becomes necessary. 'But pensions after 2027 are likely to return to their primary purpose of funding retirement and as such are savings that can be spent or given away by the saver - with one eye on the income tax consequences. 'I sometimes say to certain clients, "Think of it like everything you use this money for comes at a 40 per cent discount"'. 'But they still need a good retirement plan that shows them how much they can afford to spend and / or gift in various circumstances, and for that it is hard to beat professional financial planning advice, which will provide cash flow analyses for different scenarios.'
Telegraph
14-05-2025
- Business
- Telegraph
What is an immediate needs annuity and how does it work?
Planning for long-term care can be overwhelming, especially when faced with the emotional and financial pressures of arranging support for yourself or a loved one. One option that can provide peace of mind and financial stability is an immediate needs annuity. In return for a lump sum payment, this provides a guaranteed, regular income for life to help pay for care fees. Here, Telegraph Money explains how immediate needs annuities work, the pros and cons and how to decide if they are right for you. What is an immediate needs annuity? An immediate needs annuity, also known as an immediate care annuity, is an insurance product that pays for an individual's care home fees for the rest of their lifetime, according to Lucie Spencer, of Evelyn Partners and member of the Society of Later Life Advisers. She said: 'They are available to anyone who is receiving care, either in their own home or in a care home, who is liable for paying for their own care. Usually when someone goes into care, it is the attorneys who need to work out how best to fund the costs.' When you buy an immediate needs annuity, the annuity provider makes regular tax-free payments directly to a registered care provider, in exchange for a single lump sum payment. Andy Page, of Old Mill Financial Planning, added: 'The amount of the lump sum varies for each person and is calculated after full analysis of the individual's health conditions and prognosis. They typically return 20-35pc of the lump sum as income on an annual basis, but this can vary hugely.' How does an immediate needs annuity work? An immediate needs annuity works in a similar way to a pension annuity, but the income goes directly towards the cost of your care. Because it isn't treated as income, no income tax is applied, meaning more of the payment can cover your care costs compared to a standard annuity. Nicholas Hamilton, of tax and advisory firm Forvis Mazars, explained that 'as well as deciding the level of income that is to be paid from the annuity (which is often set to cover the shortfall between existing income, such as the state pension, attendance allowance, private pensions), and expenditure (care fees and personal expenses)', optional extras are available for your annuity. However, these can push up the cost. One example is capital protection, which allows a portion of your original lump sum to be returned to your estate if you die soon after the plan begins. Many annuities also include annual increases, known as escalation, to help your payments keep up with inflation. Mr Hamilton said: 'Providers typically will allow the annuity to increase at set rates, for example 2pc per annum, 3pc per annum or another amount (typically capped at a maximum of 8pc per annum), or else link the increase to inflation (RPI).' Some plans also offer a deferred period, where the income is paid out after a set time – usually between one and five years. These plans can be cheaper, but you'll need to find other funds to pay for care fees during the deferred period. Mr Hamilton added: 'Once in payment, the care annuity will continue to be paid for the rest of the individual's lifetime, with the ability to have the income paid to another provider should the care needs change, such as moving care home. 'If the individual no longer requires payments to be made to a UK registered care provider, they can be paid to the individual, but at this point they will then be subject to income tax.' How much does an immediate needs annuity cost? The cost of an immediate needs annuity depends on several factors, such as: Your age Your health and medical history The income to be paid from the plan Any optional plan terms you've selected Your provider's annuity formula. When calculating the cost, annuity providers will usually request medical reports from your GP as well as the care home, where relevant. 'Generally speaking, the older and poorer health an individual is in, and the least optional benefits included, the cheaper the cost of the annuity,' said Mr Hamilton. Example quotations from care provider Just Group show the average cost of providing an initial income of £20,000 per year at various ages. Based on the average health condition of a person entering residential care, with conditions such as dementia, heart disease and stroke commonly featuring, the cost of a care plan ranges from £99,202 for a 75-year-old (with no escalation), to £43,829 for a 100-year-old. On top of the cost of the annuity itself, you must factor in the cost of financial advice, as immediate needs annuities are only available through accredited financial advisers. These advisers must hold additional qualifications to provide guidance on these products due to their unique features and the vulnerability of the clients they are designed to support, said Ms Spencer. She added: 'Evelyn Partners charges a fixed fee for providing this type of advice. For obtaining the quotations there is a fee £750 and if an individual decides to proceed with annuity advice only then a future £1,750 is payable. Should they decide to proceed with other areas of financial planning, such as investment advice, then further fees are chargeable.' The key differences between a pension annuity and an immediate needs annuity are as follows: Should you get an immediate needs annuity? Whether you should take out an immediate needs annuity will depend on your circumstances, including whether you have the funds available to buy the plan in the first place. Mr Hamilton said: 'Immediate needs annuities are particularly beneficial to individuals who are expecting to self-fund their care needs for the rest of their lifetime, who like and would prefer to have some certainty over the continued provision of their care and/or the capital they can ring-fence for their beneficiaries.' However, they won't be right for everybody, particularly if you don't require care right away, expect your care needs to be short-term, or you want the option to access your money in the future. Carolyn Matravers, of later life financial planning firm Bluebell Financial Management, added: 'It is essential to seek specialist advice from a financial planner accredited with the Society of Later Life Advisers to determine whether an immediate needs annuity is appropriate for your individual circumstances.'
