What role should immediate needs annuities take in reform of the funding of long-term care in England and Wales?
The report provides answer two questions:
- What potential roles could immediate needs annuities take in funding long-term care?
- To what extent can immediate needs annuities help policymakers achieve key strategic policy objectives for social care?
At present, around 4% of self-funders in residential care use immediate needs annuities, which are a form of ‘asset protection’ against the potential costs of living in residential care for many years.
Supply-side barriers to the growth of the market include the limited number of qualified independent financial advisors able to sell the product. However, it is likely that demand barriers are more significant in constraining the market. In particular, the cost of immediate needs annuities mean they are not suitable for all self-funders in residential care.
In addition, voluntary take-up of annuity products also suffers from the behavioural tendencies of consumers, such as ‘loss aversion’, which contribute to the so-called ‘annuity puzzle’ found in many overseas annuity markets.
As such, an optimistic ‘growth scenario’ for the market might see the take-up of immediate needs annuities increase to 30% of the 120,000 self-funders in residential care, which would represent around 36,000 policies. However, this figure needs to be put in the context of the 400,000 self-funders in receipt of community care, and the one million older people who require some form of care and support.
The limited size of the immediate needs annuity market now and in the future means that it will only ever play an extremely small part in any reform of long-term care funding. In particular, it can do very little to help policymakers address the incidence of ‘catastrophic costs’ in the long-term care funding system.
It has been suggested that the use of immediate needs annuities by self-funders can help save local authorities money. However, this assertion needs qualification: those individuals most likely to fall back on state funding for residential care are also those least likely to have benefited from purchasing an immediate needs annuity.
The report also examines alternative scenarios under different long-term care funding reform options. In particular, the report explores how, as part of fundamental reform of funding for personal care, there may be scope for immediate needs annuities to play a strategic role as a risk-pooling mechanism against the accommodation costs of residential care.
This report has been published as part of the Care Funding Futures work programme run by the Strategic Society Centre. The Care Funding Futures work programme has been made possible by the support of Bupa, PwC, Age UK and Tunstall.
Author: James Lloyd, Strategic Society Centre
Download the report: Immediate Needs Annuities – Their role in funding care