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Long Term Care Annuities

Most people would associate annuities with retirement Planning.

Long term care annuities can have a number of different titles, the more commonly known as purchase life annuities and immediate life annuities. Generally these are similar to normal pension annuities, in that they are designed to provide an income for the life time of the annuitant. They can be taken out from age 55 up to age 95 with some providers and unless you added a capital protection element at the outset, their value will be lost at the time of the annuitant's death.

The differences come about by the source of the funds used to purchase the annuity.

Standard pension annuities are funded from a pension savings plan and have benefited from tax relief during the savings stage of the pension plan. However, a long-term care annuity is funded from non-pension sources of capital, such as life time savings and investments or the sale of a private residence.

Because of this, the long term care annuity is treated differently for tax purposes.

Your monthly payment is divided into two parts:

Firstly a capital part: This is effectively a small piece of the lump sum that you invested being paid back to you each month without having received interest which is therefore not subject to income tax.
Secondly an Interest Part: which is considered interest that you have earned on the lump sum that you have invested and is therefore liable to income tax at the individuals marginal rate.

One of the main benefits of a long term care annuity is that it generates a secure regular cash flow to help meet the cost of care fees. The shorter the purchaser's life expectance the higher the regular payments will be set at. Consideration needs to be given to the length of time that care is needed and how the cost of care may escalate in the future. Things may become difficult if the cost of care is increasing faster than the income from the annuity. Therefore, it would be wise to keep some capital in reserve for additional rises to the costs or unexpected circumstances.

The major problem with long term care planning is not knowing how long to plan for. If you plan with the short term in mind you could run out of money, in which case the state would provide for your care. However, this may not be in your chosen residence. If you purchase a long term annuity with the longer term in mind and care is only required for the short term, you could lose large parts or even all the capital invested.

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