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HMRC internal manual

Insurance Policyholder Taxation Manual

HM Revenue & Customs
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Immediate Needs Annuities: background and definitions

Immediate Needs Annuities were marketed as a way of providing certainty in the face ofa potentially open-ended liability for nursing care. In return for a lump sum the annuityprovides part or all of the cost of care, usually until death. On average Immediate NeedsAnnuities are used to meet half of the cost of care with the balance being met from otherincome, 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 bereflected in the price charged by an insurer. In simple terms the shorter the insurer islikely to be obliged to make payments under the contract, the lower the premium for theannuity in the first place.

Since 1 October 2004, and in the absence of special rules, all payments from ImmediateNeeds Annuities would come within the ‘partial exemption scheme’ outlined at IPTM4300. This would mean that the part of each payment thatrepresented a return of the lump sum would be tax free, but that the part of each paymentthat 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 standardmortality tables which take no account of the reduced life expectancy, so the effect isthat a much larger proportion of each payment is deemed to be taxable income than isactuarially the case.

The exemption detailed at IPTM6210 means that payments ofImmediate Needs Annuities from 1 October 2004 are almost always tax free.

Further reference and feedback IPTM1013