Immediate Needs Annuities were marketed as a way of providing
certainty in the face of a potentially open-ended liability for
nursing care. In return for a lump sum the annuity provides part or
all of the cost of care, usually until death. On average Immediate
Needs Annuities are used to meet half of the cost of care with the
balance being met from other income, such as pensions.
Immediate Needs Annuities are a form of Purchased Life
Annuity - see
IPTM4220 - known as ‘impaired life
annuities’.
The reduced life expectancy of the insured under an impaired
life annuity will be reflected in the price charged by an insurer.
In simple terms the shorter the insurer is likely to be obliged to
make payments under the contract, the lower the premium for the
annuity in the first place.
Since 1 October 2004, and in the absence of special rules,
all payments from Immediate Needs Annuities would come within the
‘partial exemption scheme’ outlined at
IPTM4300. This would mean that the part
of each payment that represented a return of the lump sum would be
tax free, but that the part of each payment that represented
interest on the lump sum premium would be taxable as income.
The calculation of the capital and income split of each
payment is based on standard mortality tables which take no account
of the reduced life expectancy, so the effect is that a much larger
proportion of each payment is deemed to be taxable income than is
actuarially the case.
The exemption detailed at
IPTM6210 means that payments of
Immediate Needs Annuities from 1 October 2004 are almost always tax
free.
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