IPTM6205 - Immediate Needs Annuities: background and definitions

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.

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.

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 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 are almost always tax free.