What happens to the annuity if my relative passes away early?

Without capital protection, the lump sum is not refunded if the person dies sooner than expected — this is the main risk. You can buy a 'capital protection' or 'value protection' option, which guarantees a percentage of the original lump sum is returned to the estate if death occurs within a defined period. This costs more upfront.

Is the income from a care fee annuity taxable?

When the annuity income is paid directly to a registered care provider, it is normally tax-free. If the income is paid to the individual instead, part of it is taxable as savings income. Always confirm the tax position with your IFA before purchase.

Can an annuity be used alongside NHS CHC or local authority funding?

Yes. An annuity simply contributes toward the weekly care fee. If your relative later qualifies for NHS Continuing Healthcare or local authority support, the annuity income continues but the family's net cost reduces. It does not disqualify you from public funding.

What is the difference between a care fee annuity and long-term care insurance?

A care fee annuity is bought at the point of need — when care has already started — in exchange for a single lump sum. Long-term care insurance was a pre-funded product bought before any care need, but it has been withdrawn from the UK market and is no longer available to new customers. Annuities are now the main protection product available.

Care fee annuities — how to protect your family from unlimited care costs

A care fee annuity — also called an immediate needs annuity — is a financial product where you pay a lump sum to an insurance company, which then pays your care home fees for the rest of your life. It removes the risk of care costs spiralling beyond what your family can afford.

Last reviewed: 23 April 2026·Reviewed by: CareGuide UK Editorial Team, reviewed by an SOLLA-accredited adviser

What is a care fee annuity?

A care fee annuity (or immediate needs annuity) is an insurance product designed specifically to fund care for the rest of someone's life. In exchange for a one-off lump sum, an insurer commits to paying a guaranteed monthly income — usually directly to the care provider — for as long as the person needs care.

How does a care fee annuity work?

The insurer underwrites the policy based on the person's medical history and current health needs. The shorter the expected period of care, the lower the lump sum required. Once purchased, the income is fixed (or index-linked, for an extra cost) and continues until death. If the person passes away earlier than the underwriter's projection, the insurer keeps the balance — unless capital protection has been added.

Who is a care fee annuity suitable for?

Annuities tend to suit families who:

Have significant capital but want to cap the total cost of care
Are worried that savings or investments will be exhausted before the person passes away
Want certainty rather than the volatility of drawing down investments
Want to protect a remaining estate for family members

How much does a care fee annuity cost?

The lump sum required varies enormously — from around £50,000 for someone with very high needs and a short life expectancy, to £200,000 or more for someone in better general health. Quotes are highly individual and only available through a specialist adviser after underwriting.

What are the advantages?

Certainty — fees are covered no matter how long care is needed
Tax efficiency — payments direct to the care provider are usually tax-free
Peace of mind — removes the fear of assets being exhausted

What are the risks and downsides?

If the person passes away early, the lump sum is not refunded (unless a capital protection option is purchased)
Lump sum required upfront — not suitable for everyone
Must be arranged through a specialist IFA — not available directly

Alternatives to a care fee annuity

Drawing down capital, equity release, downsizing, or running care costs from income alone are all alternatives. Each has different risks. A specialist adviser can model them side by side. Read our self-funding guide for an overview.

Why you must use a specialist IFA

Care fee annuities are complex, irreversible, and based on detailed medical underwriting. Only an FCA-regulated, SOLLA-accredited adviser can recommend one. We can introduce you to a specialist for free.

Frequently asked questions

No. Care fee annuities (also called immediate needs annuities) are only available through FCA-regulated, specialist Independent Financial Advisers — typically those with SOLLA accreditation. The product is highly personalised and based on detailed medical underwriting, so an adviser is essential.