What is the ‘Care ISA’?

It doesn’t actually exist yet, but that hasn’t quelled the speculation around the Care ISA.

According to government ministers, pension funds and insurers, a Care ISA could either be the solution to the ongoing pension crisis, or it could be a costly distraction from an unavoidable problem.

It has been widely reported that the majority of Brits are simply not saving enough for later life. According to the latest Living Longer Report from the Office of National Statistics, in 50 years’ time, there are likely to be an additional 8.6 million people aged 65 years and over. This suggests that the long-term care crisis is only going to get worse. But who is going to pay for it?

Research from Aegon recently revealed that 64 per cent of people agree that there should be a cap on how much individuals should pay towards care costs. More than half (57 per cent) want to exclude their property from the assets used to pay for care costs.

The government appears to have taken note. The full details of the Care ISA are set to be revealed in an upcoming Social Care Green Paper which will be announced in the autumn. But leaked documents have implied that the Care ISA would be capped to reflect care costs, while any unspent money could be passed onto the account-holders family without taxation.

In March 2017, the government released a green paper on social care funding, as a way of tackling the looming long-term care crisis. And earlier this month, former pensions minister Baroness Altmann backed the introduction of a new ‘Care ISA’ to fund end-of-life treatment.

“Each person could be allowed a Care ISA fund up to a maximum sum, to be spent on care,” said Baroness Altmann. “They could transfer existing ISA balances into this Care ISA or fund it from new savings.

“Encouraging the current cohorts of older people to keep some ISA savings for later life, in case they need care, can contribute to solving the care funding crisis.”

There is another big benefit to the proposed Care ISA. As well as paying for long-term care, it could also be used to ringfence savings from inheritance tax, thus removing the temptation to spend or give away large sums of money in an effort to avoid taxation.

At the moment, the law states that any ISA is treated as inheritance upon the death of the account holder and it is taxed accordingly. Inheritance tax rules state that any money or assets above the value of £325,000 will be taxed at a flat rate of 40 per cent.

With this in mind, the concept of a Care ISA would be understandably appealing to pre-retirees. But not everyone is on board with the proposal.

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The problems with a Care ISA

Critics of the Care ISA have claimed that it will only benefit the wealthiest 5-10 per cent of Brits, and may not do much to encourage people to save. There has been no public discussion of proposed interest rates or government bonus schemes, and it is not clear who would be eligible to save, or whether ISA transfers would be allowed.

“We now have a plethora of different ISAs for different purposes and this is already confusing for customers, as shown by the fact that ISAs still only attract the minority to non-cash long term saving,” said Ed Monk, associate director for personal investing at Fidelity International. “This seems to be a case of tinkering with the savings system for political purposes rather than addressing the needs of the majority.

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“The costs of social care are high and too much for all but the wealthiest families to bear without help. But these costs don’t fall on everyone, which is why a pooled-risk approach still seems most likely to solve the challenge of mounting social care bills.”

Monk added that wealthy families are already “have many advantages in the tax system”, including getting tax relief on family properties and benefitting from high-threshold offshore accounts. The Care ISA risks increasing the wealth gap by making it easier for wealthier households to save for long-term care, while doing little to help the average person.

Writing on Twitter, head of the Commons Health and Social Care Committee, Dr Sarah Wollaston warned: “This won’t solve the care crisis at all. There is no pooling of risk.

“It only ‘solves’ it for a small minority of wealthy people who can afford to invest and whose families benefit from paying lower tax on their inheritance if not used for care.”

This view was echoed by a range of economists and analysts, who welcomed the need for more long-term care funding, but cautioned against the use of a Care ISA.

“The need to fund care in later life is becoming an increasingly pressing issue,” said Kerrigan Procter, chief executive of Legal & General Capital. “It’s great to see that the government is looking for innovative ways to tackle this by considering new ideas such as the ‘Care ISA’, but financial products like these won’t be enough.

Along with other financial experts, Procter has suggested that more funding for later-life housing could make a big impact on the financial security for the elderly. In fact, Legal & General Capital research has shown that well-run retirement communities can reduce GP visits by 50 per cent and NHS spend by 40 per cent.

However, until the government crystallises its plans to tackle the looming care crisis, it is unclear what impact – if any – the Care ISA will have on the way in which long-term care is funded.

Until then, savers should focus on the existing options available for self-funding long-term care.

How to save for long-term care without the Care ISA

In the absence of a Care ISA, there are still many ways in which British taxpayers can save for their long-term care.

1. Other ISAs

Cash ISAs, Stocks and Shares ISAs and Innovative Finance ISAs allow people to save up to £20,000 per year, tax free. This allowance resets at the end of each tax year, so over time savers could build up a significant nest egg – especially when compound interest is taken into account.

2. Annuities

Annuities can help to supplement the state pension by paying out a set figure for each year of your retirement. Any annuity income which has not been used can be sheltered within another ISA wrapper, and used as a later-life fund.

3. Insurance add-ons

Some life insurance policies now offer add-ons which allow the payee to save specifically for long-term care. However, the cost of these policies can vary significantly depending on the health and age of the policy holder.

4. Bonds

Investment bonds can also help with saving for long-term care. While money held within a bond is subject to taxation, bond holders can withdraw up to five per cent per year without paying any tax.

5. Property

Finally, many elderly people choose to release equity from their home to fund long-term residential care. This can be done by re-mortgaging the property (although this option is not widely available to over-70s), selling the property or downsizing.

Also published on Medium.

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Kathryn Gaw

Kathryn Gaw is a financial journalist based in Belfast, Northern Ireland. She has been writing about personal finance and investment trends for more than a decade, and her work has been featured in the Financial Times, City A.M., the Press Association, and The Irish Independent, among many other publications.

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