Equity release and immediate needs annuities: paying for care from the house

If your parent wants to stay in their own home with carers coming in, the house is left out of the council's means test, and a deferred payment agreement is not available to them because it only covers care home fees. That leaves equity release, an annuity bought with other capital, or a move. If a care home is the more likely plan, equity release loses its point, because the loan has to be repaid once the move is permanent.

This page goes further into the two products than how to privately fund care, which sets the house beside savings, investments and family money, and self-funding your care, which sets a deferred payment beside equity release for a care home. The funding care guide has every route, public and private, in one place.

Age UK says a lifetime mortgage is the more common of the two. Some let your parent pay the interest each month, or pay some of the loan back, which slows the growth of the debt; otherwise the interest rolls up. A drawdown plan releases a smaller amount at the start and keeps a reserve to draw on later, so interest only runs on what has been taken. That can suit care costs, which arrive week by week. Age UK notes two catches: the lender can withdraw the reserve, and if your parent loses mental capacity no more money can be drawn unless somebody holds a Lasting Power of Attorney, which some providers will not deal with.

With a home reversion plan there is no debt and no interest, but the provider pays less than market value because it has to wait for its money. The younger your parent is, the less they are offered. If the plan ends after only a short time, part of the house has been sold cheaply. Some plans offer a rebate in that case, called capital protection, but only if it is chosen at the start, and it reduces what is paid out.

Age UK warns that the amount owed can grow very quickly. The longer the loan runs, the larger it becomes, so taking a large sum years before it is needed is expensive. A drawdown plan, or paying the interest where your parent can afford to, keeps the total down.

The Equity Release Council's standardsSection titled The%20Equity%20Release%20Council%27s%20standards

The Equity Release Council is the trade body for the industry, and membership is voluntary. According to MoneyHelper, most equity release providers are members. The Council's standards require every lifetime mortgage its members sell to have:

• an interest rate that is fixed, or variable with a cap, for the life of the loan
• the right to live in the home for life, or until a permanent move into care, as long as it stays the main home and the terms are kept
• the right to move the plan to another suitable property
• a no-negative-equity guarantee: if the house is sold for the best price reasonably obtainable, neither your parent nor their estate will owe more than it is worth, after reasonable selling costs
• the right to make repayments without a charge, subject to the lender's criteria
• any early repayment charge waived if your parent moves permanently into long-term care, including care with relatives, once a doctor has certified it

Members must also make sure every customer has independent legal advice, and Age UK says that includes at least one face-to-face meeting with a solicitor. If an adviser recommends a product that does not meet the standards, they have to explain why and what the risks are.

So the order matters. Before releasing a penny, ask the council for a care needs assessment and a financial assessment, and get a full benefit check. Local authority funding explains both assessments, and Council Tax, Pension Credit and grants covers the help that could be lost. Attendance Allowance is different: it ignores savings, so equity release does not touch it, and it should be claimed first.

If your parent's savings are already well above the upper limit, releasing more will not change what the council pays. It matters most for somebody near or below the limit, where a lump sum can end council help. An FCA-authorised adviser must consider what equity release would do to your parent's benefits before recommending it, and must refer you to somebody who can answer if they cannot.

1. 1

   Specialist advice and a quote

   Before anything is paid

   An adviser qualified in long-term care looks at your parent’s health, age, income and care costs, and gets quotes from insurers. Poorer health means a cheaper plan, because the insurer expects to pay for less time.
2. 2

   A single lump sum goes to the insurer

   The capital is spent

   Your parent pays the premium from savings, investments or the sale of a house. For an extra cost the plan can include capital protection, which returns part of the lump sum to the estate if payments stop early.
3. 3

   A guaranteed income starts straight away

   30-day cooling-off period

   The plan covers an agreed amount each month for the rest of your parent’s life, usually set to fill the gap between their income and the care bill. Most plans can rise each year, by inflation or a fixed step, for a higher price.
4. 4

   The insurer pays the care provider

   Tax-free only when paid this way

   Paid to a care provider registered with the CQC, or to a council, the income is free of income tax. That is the arrangement the product is built around, and it is why the provider you use matters.

The lump sum can come from anywhere, including the sale of a house, and MoneyHelper says a plan can be used for care at home as well as in a care home. What the plan protects against is the length of time care lasts. If your parent needs care for many years, the insurer keeps paying long after the lump sum would have run out. If they need it for a short time, the insurer keeps the rest, unless capital protection was bought. The statutory guidance tells councils to count annuity income in full in their financial assessment.

In the FCA's rules an annuity of this kind is a long-term care insurance contract, and an adviser who recommends one must hold an appropriate qualification for that specific advice. MoneyHelper recommends a specialist care fees adviser. MoneyHelper's guide to immediate needs annuities sets out who it suits and who it does not.

A partner in the house needs particular care. If both are joint borrowers on a lifetime mortgage, the plan carries on while either of them still lives in the house, so the partner can stay. If only one of them is a borrower, the other may have to repay the loan or leave when the plan ends. For care home fees the council ignores the house while a partner, or a relative aged 60 or over, still lives there, which is one more reason not to release equity in order to pay a care home. Couples separated by care needs covers what else changes when one partner moves.

If the NHS might pay, read who qualifies for NHS Continuing Healthcare before buying anything.

1. 1

   Claim what is not means-tested, and ask for the assessment

   First, and free

   Attendance Allowance ignores savings and the house. A council care needs assessment is free whatever your parent owns, and it may show the council should be paying part of the cost.
2. 2

   Downsizing

   If your parent can manage a move

   A smaller or single-storey home can make care easier. What is left over is savings, with no interest building on it.
3. 3

   A deferred payment agreement

   If a care home is the plan

   The council pays the fees and waits for its money until the house is sold. It does not pay for carers at home.
4. 4

   Letting the property, or a room in it

   Income without borrowing

   A lodger can bring in up to £7,500 a year free of income tax under the government’s Rent a Room Scheme. If your parent has moved into a care home, the whole house can be let while a deferred payment is in place. Ask the council how it would count the rent in its financial assessment.
5. 5

   Help from the family

   Agree it in writing

   A family can pay towards care, top up care home fees, or lend money to be repaid from the estate. Take legal advice on a loan so that it is not mistaken for a gift.

Downsizing and equity release both turn a house into money, but downsizing leaves no debt growing in the background. Let your parent be part of that decision for as long as they can be. A deferred payment only helps with a care home, and who a council must offer one to, and what it costs goes through the scheme in full. If family are paying, care home top-up fees and whether your mum can pay you to care for her cover a family paying towards a care home and a parent paying a relative to care, and live-in care with family in the house covers a relative living alongside a carer.

For equity release, the FCA's rules say a firm must give advice before selling a plan, and a sale without advice is only allowed if your parent has rejected that advice. The adviser must take reasonable steps to make sure the plan is suitable, and gives your parent a key facts illustration setting out the plan and its costs. Their own solicitor then checks the offer.

The Equity Release Council has a directory of member advisers and solicitors. MoneyHelper's guide to equity release explains how to find an adviser and what they must give you, and Age UK's equity release guide sets out the risks and the free advice available. Check any firm on the FCA register before you meet them.

If you manage your parent's money under a power of attorney, tell the adviser at the first meeting. Age UK says some providers will not deal with an attorney, and paying for care as an attorney sets out what the role does and does not allow.