Deferred Needs Annuity
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Deferred Needs Annuity
Michelle Boakes from Verve Financial talks to us about deferred needs annuities.
What does it mean when an annuity is deferred?
With a deferred annuity rather than immediate annuity, it just means that income is not paid from the outset – instead it’s delayed for a pre-agreed period of time. You get to decide how long that deferral period is. It can be anywhere from one year to five years.
What types of deferred annuities are there?
There’s just one option – it’s deferred annuity or immediate annuity. In immediate annuity, which we’ve spoken about before, you hand over a lump sum and the provider pays you an income to either yourself or to your registered care provider.
If you choose a deferred needs annuity, the income won’t start until the end of that deferred period. For example, if you purchased a deferred needs annuity on September 1 and you decided you wanted it to be deferred for one year, your payments would start on September 1 the following year. Again, they can be paid either to you directly or to your registered care provider.
How much money should I put in a deferred annuity?
The amount the annuity costs depends on how much income you’re going to need. The first thing you need to identify is how much your care fees will cost. Then, once we’ve calculated what that need is, we would then submit all of your details to a registered provider of immediate needs or deferred needs annuities.
They would fully underwrite the plan – it would be bespoke to your circumstances. That would give us the premium required for the income you need.
How soon do payments begin with a deferred annuity?
The deferral period can be anywhere from one year up to five years, although the majority of providers only look at two years’ deferral. But there are some ways you could go up to five if needed.
How are deferred annuities taxed?
This depends on who the immediate annuity provider is paying. If they’re paying the registered care provider directly, the income won’t be taxed. If they’re paying the income directly to yourself, because your care provider isn’t one of the registered ones the provider is set up to pay, then it will be taxed.
Not all of it will be taxed, however. It will be specific to the annuity set up and your circumstances.
What are the pros and cons of a deferred annuity?
The main positive of the deferred needs annuity are that it’s a secure, guaranteed income to pay for your long term care. It’s a bespoke and fully underwritten policy which is tailored to your own circumstances.
It can offer really valuable peace of mind to you and your family. Another benefit is that it provides a regular stream of income to a care provider, which always helps when you’re negotiating fees. It’s also tax-free if it’s paid direct to your care provider. A deferred needs annuity can be much less expensive than the immediate needs option. It’s definitely worth considering.
The negatives are that the income payment is delayed, so during that period you are responsible for meeting all of your care fees, regardless of the circumstances. That’s because the deferred period cannot be changed after the policy has been set up.
Additionally, you may die early on in the plan. If you die during your deferred period there will unfortunately be no return of capital – unless you have chosen a capital protection option, which may be available from the provider.
We always have to bear in mind that care costs tend to increase at a higher rate than inflation. So if you haven’t chosen for your income to increase, or you’ve chosen to increase it but care fees are increasing more quickly, you may have to meet some of the care costs from your income. Depending on your situation, that could cause a problem later on.
How can a financial adviser help?
When it comes to deferred needs annuities, they do appear to be slightly higher risk than the immediate option, just because of that deferral period. What a licenced financial advisor can do is really tailor the advice to your specific circumstances.
We would have a look at all of the ways that you could meet your care costs and compare an immediate needs annuity with the deferred needs annuity. We will give you a good overview of how much each option is going to cost and provide insight into which one’s going to be best for you.
Approver Quilter Financial Services Limited & Quilter Mortgage Planning Limited. 19/05/2023