Should I buy an immediate needs annuity to pay my 86-year-old mother's care fees? STEVE WEBB replies

My mum has been in a residential care home for eight years and is now 86. She is self funded. She is in reasonable health.

In short if I take no action then her money will run out in approximately six years. The current fees are £60,000 a year. Her pensions provide £20,000 a year.

I am looking at buying an annuity to help cover her fees for the rest of her life. I have used a financial adviser, as you have to do to get this type of annuity.

Quotes that have come back would provide £40,000 per year, RPI-linked for the rest of her life. This would cost £270,000 which is roughly what her house is worth - it is currently rented out. She would have about £30,000 left in cash.

My dilemma is that if I just let her cash run out in six years then someone will have to pick up the tab for £40,000 (plus inflation). If I buy the annuity someone will have to pick up the tab for a much lower amount but sooner, probably in two to three years. The care fees will increase by more than RPI inflation.

The family is in no position to help with care costs. I have contacted Adult Social Care to ask for an informed comment and dialogue, but they are unable to do that.

I am trying to do the right thing for my mum as I don't want her moved to a horrible care home when her money has gone. Everyone makes the right noises that she would be able to stay in the place she is currently in, but nothing is guaranteed.

Obviously if I bought the annuity and she passed away sooner then the money would be lost, but that is not my concern. An assessment from yourself on this would be very helpful.

Steve Webb replies: The costs of making sure someone you love is well cared for in later life can be astronomical as you have discovered.

But they are also highly unpredictable as you have no idea how long they will have to be paid.

Because of this uncertainty, some people choose to buy a financial product known as an 'immediate needs' annuity.

This is, as you say, a policy which aims to fill the gap between a person's regular income and their care costs, and which will go on doing so for as long as they need it.

The money from the policy is paid directly to the care home and is tax free. This is one advantage of such a policy over simply using your mother's assets to buy a regular income via a standard annuity which would be paid to her and would be subject to tax.

Immediate needs annuities are complex financial products and as such are sold through financial advisers. An adviser will be able to look at your individual circumstances and recommend whether an immediate needs annuity would be suitable in your situation.

They should also consider whether your mother's assets could be invested in some other way to underpin her potential care costs.

One advantage of products of this sort is that they can be customised to meet your particular needs and also how much risk you are willing to take.

One option is to have some sort of guarantee so that in the sad event that your mother were to die not long after taking out the policy, you would get most of the premium back.

In policies of this sort, the value of the guarantee gradually declines the longer the policies pays out. Naturally, you would pay more for a policy with this kind of protection.

Another option is to take out the product now but defer the start of the payouts, perhaps by a year. The price of this product would, of course, be lower (because it didn't pay out in the first year) but you would also have to pay the shortfall on the care fees in the first year.

This approach reduces the risk that you spend money on a policy that it turned out you didn't need, but it can be more expensive in the long run.

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I see you have been quoted a one-off premium of £270,000 which would pay out £40,000 per year plus inflation for as long as your mum lives.

It's worth remembering that her other income, such as from state pension, private pension or benefits is also likely to rise each year (by varying amounts) to take account of inflation and possibly more.

In trying to judge if a policy is good value, it is worth being aware of how long an average woman of your mother's age could be expected to live, and also the range of uncertainty around that average.

I have checked the life expectancy tool on the website of the Office for National Statistics and a woman of 86 today is expected to live on average to 93.

So, if you were to receive seven years of payments at £40,000 per year (plus inflation), you would get back slightly more than you have paid in.

But there is a one in four chance that your mum will live to 96 and a one in 10 chance that she will live to 99 and in this situation your annuity would prove to have been excellent value.

These are of course averages and can only ever be a rough guide. I assume that the annuity provider has asked detailed questions about your mother's health and perhaps thinks that because she has already lived a number of years in a care home she may have below average life expectancy.

But given that you think your mother will run out of money in around six years, these life expectancy figures clearly suggest that there is a fair chance that she could indeed find herself in a position where she can no longer fund her own care, possibly for several years.

If that were to happen, your mother would need to apply to her local authority for funding.

She should be eligible for funding provided her remaining savings were below the capital limit of £23,250 if she lives in England (different rules apply in other parts of the UK).

But, as you are aware, many local authorities will only offer funding to cover a place at one of the lower cost providers in the area, and this may not meet the full costs of care where your mother currently lives.

She would then have to either move to somewhere where the fees are covered (obviously highly undesirable for a person in their early 90s), or seek a 'third party top-up' from a family member, and you've indicated that this is not an option.

Another option might be to see if the existing care home could offer something at a lower cost, perhaps by moving your mother to a smaller room.

It's worth saying that care homes often charge different rates depending on whether or not someone is self-funding, and if your mother became dependent on local authority funding it is quite possible there could be some flexibility on her fees.

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Given that your top priority is making sure that your mother is secure in her current home for as long as she lives, and are prepared to accept the fact that buying an insurance policy will mop up virtually all of her assets, then it seems to me well worth you exploring this further with a specialist adviser.

Not all financial advisers are expert in this area, but members of the Society of Later Life Advisers are more likely to have the specialist knowledge required.

One final thing to bear in mind in your planning is that your mother's needs may increase as she gets older.

You have indicated that she is currently in a residential care home, but it is possible that she may need nursing care at a later stage, and this could be more expensive and not necessarily offered by her current home.

There is additional public funding towards the fees of those who need nursing care, but you may want to discuss with your adviser the possibility of a period later in your mother's life when additional fees may apply.

I wish you well in finding a solution that will give both you and your mother the peace of mind that you are seeking.