Care fees annuity: how it works and what it costs

A care fees annuity (an immediate needs annuity) pays a set income for life, usually straight to your care provider. What it costs depends on age and health.

Choosing how to pay for care is rarely a calm decision, and a care fees annuity is only one of the routes. This guide explains how the product works, when payments can be tax-free, what moves the price and who sells it. If pension money is part of your plan, Pension Wise, the free, impartial, government-backed service from MoneyHelper, gives guidance on taking a defined contribution pension. For a person to look at your savings, home and care needs together, the short form here can arrange a free call from an FCA-authorised adviser.

Check what the council and the NHS may pay first

MoneyHelper’s guide to immediate needs annuities (as archived in July 2025) says: "It’s important to consider all your options first." Public funding is the first of those options, and it does not depend on buying anything.

• Council funding. MoneyHelper’s council funding page (archived August 2025) says you "might be eligible" for help from your council if your savings and capital are below the threshold, and that a care needs assessment "is free, and anyone can ask for it, no matter how much savings you have or your income". Thresholds change by year and nation, so check the current figures with your council.
• NHS continuing healthcare. MoneyHelper’s continuing healthcare page (archived August 2026) says that if you are assessed as having a "primary health need", the NHS is responsible for providing and funding all your needs. The route in is to ask a GP or social worker to arrange an assessment. A good chance of qualifying for NHS continuing care is one of the reasons the July 2025 guide gives for an immediate needs annuity not suiting someone.

Thresholds and guidance may have changed since those copies were archived. Because a plan cannot normally be undone once the cooling-off period ends, it is worth having these assessments settled before money changes hands.

How a care fees annuity pays out

You pay a lump sum, and in return the insurer pays a regular income for the rest of your life. MoneyHelper describes it as income meant to fill the gap between what you receive and what your care costs, for life, with the income "paid directly to the care provider". Other names for it include immediate care plan, immediate needs annuity and immediate need care fee payment plan. It is a specialist relative of the pension annuity; in tax law it is a kind of purchased life annuity, the type covered in purchased life annuity rates.

Legal & General's adviser page, read on 20 October 2026, says its Lifetime Care Plan provides "a guaranteed monthly payment for life", and adds that the plan "doesn't guarantee to cover the entire cost of care", with the client responsible for any shortfall. MoneyHelper makes the same point: care costs "might increase faster than the income from your plan". Most plans offer an income that rises, either with inflation or by a set amount each year, and for an extra cost a capital protection option can return part of the lump sum to your family if you die early.

When payments are tax-free, and when they are not

The tax rule is in section 725 of the Income Tax (Trading and Other Income) Act 2005. No income tax is due on the part of an annual payment under an immediate needs annuity that is made "for the benefit of the person protected under that annuity" and "to a care provider or a local authority in respect of the provision of care for that person". Two conditions therefore sit in the wording: the payment is for the protected person’s benefit, and it goes to a care provider or local authority.

Section 726 says a care provider must carry on a trade, profession or vocation that includes providing care and must meet the care registration requirement. In England that means being registered under Part 2 of the Care Standards Act 2000 or Chapter 2 of Part 1 of the Health and Social Care Act 2008; Scotland, Wales and Northern Ireland have their own registration rules in the same section. The Act also defines the annuity itself: it must protect against being unable to live independently without assistance because of an impairment, injury, sickness or other infirmity "expected to be permanent".

The insurers apply this in practice. Legal & General says payments made "directly to your client or anyone other than a UK regulator registered care provider are subject to income tax", and that if the client stops needing care the plan cannot be cancelled and payments go to them. Whether your own care setting would qualify is worth confirming with the provider before you commit. An FCA-authorised adviser can check it alongside the rest of your position; to ask for that check, use the form on this page.

What sets the price

Neither provider publishes prices on the adviser pages described below, so there is no figure to give here. MoneyHelper says the price of a plan typically depends on:

• your age
• current annuity rates
• the level of income you need
• whether the income stays the same or increases over time
• your health and life expectancy

On the last point: "the poorer your health or shorter your life expectancy, the cheaper the plan will be". That is the opposite of how most people expect insurance to work, and it may be hard to hear, but it is how the pricing is described. Adding capital protection costs extra, as above. Why rates move is in where annuity rates are heading, and enhanced annuity rates explains the health-based pricing used for pension annuities.

Who sells them, and how you arrange one

Two insurers describe plans on their adviser websites. Legal & General’s Lifetime Care Plan is for people "aged 60 and over when they apply". Just offers an Immediate Care Plan and a Deferred Care Plan for people aged 60 or over who are already receiving care or will be within 12 months; each includes a six month money back guarantee, under which, if the person dies within the first six months, Just pays the estate a percentage of the premium less payments already made. Just also says payments to UK registered care providers are tax free under current legislation. Both pages are written for advisers and say so; the Just page is undated. Other insurers may sell these plans, and an adviser can say who currently does.

MoneyHelper says "you’ll need financial advice to check it’s right for you", and points to a specialist care fees adviser; where to get annuity advice covers the wider question. A deferred needs care annuity, which starts later, is a variation the same guide describes, with care fees until then paid from other resources. For lifetime mortgages as another way to fund care, see equity release.

What to weigh

• It cannot be cashed in. MoneyHelper says the cooling-off period is usually 30 days; after that you cannot cancel and get money back "if, for example, you stop needing care". How this works for annuities generally is in cashing in an annuity.
• Benefits. Both MoneyHelper and Legal & General warn that payments may affect means-tested benefits. See Pension Credit for how that benefit treats income.
• Temporary care or a wish for your money back. Both are listed in the July 2025 guide as reasons a plan might not suit.

Care fees annuity questions

Is a care fees annuity taxed?

Under section 725, the part paid to a registered care provider (or local authority) for the protected person’s care is outside income tax. Payments sent elsewhere are taxable, per Legal & General.

Can I buy one with my pension?

Section 725 defines an immediate needs annuity as "a contract for a purchased life annuity"; whether pension money can be used is something to ask an adviser. Taking pension cash has its own rules, in your options at retirement.

Can I get one before I need care?

The deferred version starts later, per MoneyHelper, which says you fix the rate in advance, for better or worse.

Your next step

A care fees annuity swaps a lump sum for fixed help with fees, on terms that cannot be reversed. If you want it weighed against your home, savings and likely care, the form on this page can request a no-cost phone call from an adviser who holds FCA authorisation.

Sources: MoneyHelper, immediate needs annuity (archived copy, July 2025); ITTOIA 2005 s725 and s726; Legal & General, Lifetime Care Plan; Just, care plans; MoneyHelper on council funding and NHS continuing healthcare (archived copies).