A rumoured new ‘Care Isa’ has reignited the troubling debate over how to make an aging population pay care bills that few budget for earlier in life.
The idea of a new Isa ringfenced from inheritance tax has sparked criticism that it will only benefit the small minority of wealthy people liable for inheritance tax.
Naysayers also point out that people already face a large and confusing array of Isas encouraging them to save for a host of different goals.
Government mulls solutions: A Care Isa that allows people to ringfence some of their savings from inheritance tax is being reportedly being considered
The controversy is ramping up as the Government prepares to launch a new consultation paper on how to address social care funding.
This is a politically sensitive task, which the Tories have postponed since the 2017 election.
Their manifesto proposal for a £100,000 ‘floor’ on the amount individuals contribute for care bombed so badly with voters they were forced to ditch it in the middle of the campaign.
We take a look at why sorting out how we pay for social care is so important and contentious, how a Care Isa might work, what financial experts say about that idea and other proposals to meet the challenge.
Why is there a social care funding ‘crisis’?
There is widening gap between the public funds available to pay for social care and the burgeoning needs of an aging population.
While most people have saved towards pensions to provide an income for later life, few are financially prepared for the stiff costs of care in their later years.
For those with prolonged care needs, the bill can become so vast that it is totally unaffordable, even for those who have a home to sell as the last resort.
This is further complicated by a ‘fingers crossed’ mentality among a lot of people, who hope they will die either suddenly or relatively quickly before they run up a huge care bill.
Some people will ‘get away with it’ – but plenty won’t, and with dementia on the rise as people live longer, it’s not a sensible bet.
How big is the financial challenge?
Spending on social care will rise from 1.1 per cent of GDP in 2016-17 to 1.9 per cent in 2067-68, according to forecasts in a recent report by the Office for Budget Responsibility.
It projects that if eligibility rules for care are relaxed to cover more people, spending would have to rise to 2.5 per cent of GDP.
The Local Government Association says the Government needs to address a £3.5billion ‘funding gap’ by 2025, just to maintain existing care provision.
‘Adult social care is at breaking point due to years of underfunding, rising demand and costs for care and support,’ it says.
‘Anyone may need social care and support at any stage of their lives, particularly as we grow older, but a lack of certainty of future funding of adult social care and the split of responsibilities between individuals and councils in who pays for it, is making this hard to financially plan for.’
Meanwhile, a Which? report published this week found just 12 per cent people aged over 55 have saved money to cover future care needs.
Some 55 per cent said their priority was spending on things they wanted or needed to do at present.
The consumer group says this suggests any forthcoming government proposals that put the burden on people to plan themselves for care needs may be doomed to failure.
Alex Hayman, the group’s managing director of public markets, says: ‘The broken social care system cannot continue to fail older people and their families in delivering high-quality, affordable care when they most need support.
‘The Government must recognise that most people won’t have made extensive plans for their care, so the system must be designed to help people get the support they need at a time of crisis and stress for themselves and their loved ones.’
What makes care funding so controversial?
Someone’s got to pay, but who should bear the burden?
The Tories answer to this in last year’s election proved politically toxic and was swiftly dropped.
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There was an outcry against its plan to deplete an individual’s assets – including their home – down to a £100,000 floor, no matter whether they need care in their own home or in a residential home.
They then mooted a cap on bills, promised another consultation on social care and postponed further discussion until this summer.
A government green paper has still not materialised, although it might come soon.
Meanwhile, the current system where someone’s assets – including the family home – is depleted down to £23,250 if they need to go into a care home remains in place.
Everyone seems to agree that people should contribute something towards their care in old age, and that wealthy home owners shouldn’t expect to be massively subsidised by other taxpayers who might be struggling financially.
The crux of the issue is whether people should be forced to pay unlimited sums or whether their bills should be capped at a certain level, given that no-one knows what kind of help they will end up needing in old age.
The worry is that without a cap, elderly people might end up facing an unfair health and postcode lottery.
Certain conditions like dementia can require assiduous long-term care, while others are fatal immediately so require none.
Meanwhile, people who live in areas that have seen huge house price increases often do so by accident of birth or where they need to work.
They already pay a higher cost of living, and their families are landed with bigger inheritance tax bills when they die.
If the risk of devastatingly high care bills is to be ‘pooled’ in some way, as many believe will eventually be necessary, no consensus on how best to do this has emerged yet.
How would a Care Isa work?
A new Care Isa that allows people to ringfence some of their savings from inheritance tax is being considered by the Government, according to a report by Anna Mikhailova in the Sunday Telegraph.
Isas are ordinarily taxed when the holder dies, but under the plans any money left over in new savings plans to help meet care costs in later life would be passed to heirs free of ‘death tax’.
However, only an estimated 5 per cent of people leave estates sufficiently large to make their beneficiaries liable for inheritance tax, although the figure is expected to hit 10 per cent due to the big rise in the value of people homes.
Widows, widowers and bereaved civil partners have been able to claim an extra Isa allowance called the Additional Permitted Subscription since 2014.
The allowance is equal to what a partner held in their Isa at death.
The proposed Isa would be capped to reflect care costs. But the Tory head of the Commons Health and Social Care Committee, Sarah Wollaston, dismissed the idea, writing on Twitter: ‘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.’
What do financial experts say?
Introduce Care Isa and consider allowing tax-free pension withdrawals
Baroness Altmann, the Conservative peer and former pensions minister, backed the idea of introducing a special Care Isa allowance, which could pass on free of inheritance tax if unused.
Ros Altmann: Former Pensions Minister backs idea of a Care Isa
She said: ‘Each person could be allowed a Care Isa fund up to a maximum sum, to be spent on care.
‘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.
‘Rather than spending the money on a new car, a cruise or giving it to other family members, some people might prefer to keep it as a care fund, just in case they need it.’
She believes tax-free pension withdrawals should also be considered, saying: ‘Most people are shocked when they suddenly face enormous costs, for which they have made no prior provision and had no idea the NHS does not cover.
‘Retirement funding has always been about pensions, with no consideration for care. Government has budgeted in advance for pension costs, companies and individuals have contributed huge sums for pensions, but a pension income is not designed for the high costs of care.
‘Therefore, allowing tax-free pensions withdrawals could be another part of the solution. Insurers have also suggested some kind of insurance for care needs too.’
Wealthiest savers already enjoy many tax advantages
‘Another Isa. 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,’ says 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.
Ed Monk: ‘This seems to be a case of tinkering with the savings system for political purposes’
‘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.
‘It’s not clear how a Care Isa that alleviates inheritance tax will help the majority when, at the last count, IHT falls on just 4.2 per cent of estates.
‘Wealthy families who would stand to benefit from a Care Isa already have many advantages in the tax system if very costly care bills land.
‘Under the current rules, family homes enjoy substantial relief from IHT in a way similar to what is now being proposed for ISA savings earmarked for care.
‘In this sense, wealthy families are likely to already have a store of wealth in their home to pay for care which they can pass on without tax if it’s not needed.”
Government should consider ‘auto enrolment’ savings system for care
‘With recent studies showing that a miniscule part of the population are putting aside money for their future care needs it’s clear that something has got to give,’ says Rachael Griffin, tax and financial planning expert at wealth manager Quilter.
‘The Care Isa by itself will not be the silver bullet. It does give people an incentive to set aside money for their care, but that on its own may not be enough.
‘Plus yet another Isa risks muddying an already murky Isa landscape at a time when savings simplification is the name of the game.
‘Much like pensions, people put funding social care as a point on their to do list. Government should consider an auto-enrolment like system for social care.
‘This could be coupled with a compulsory social care premium, which would be paid to provide a base level universal care.
‘The crucial point in any policymaking is having the public on board and confident that the policy in place is there for the long-term. Transparency and engagement are going to be crucial.’
Cash Isas not suited to saving towards social care
An IHT exempt fund which can be designated for care costs or left to family tax-free is a perfectly good idea but there is no need for yet another type of Isa, according to Kay Ingram, director of public policy at financial adviser LEBC Group.
Kay Ingram: Cash Isa accounts not suitable when planning for long term care needs
‘Pension savings already allow the saver to designate part of their funds for later life care and if they don’t need the funds to that end, the saver can leave their pension fund IHT free to a nominated person (or persons).’
She also notes that 80 per cent of all Isa funds are invested in cash accounts, which are not suitable when planning for longer term care needs.
‘The real value of cash accounts is constantly eroded by inflation, with the cost of care fees increasing year on year well ahead of inflation.
‘Money set aside for this purpose needs to be invested in assets which can at least keep pace with but preferably exceed inflation – an equity linked Isa perhaps.’
Adding more Isas creates confusion and undermines their simplicity
‘The Care Isa is an ill-thought-out idea,’ says Adrian Lowcock, head of personal investing at Willis Owen.
‘It will do very little to help the majority of people who need care in their old age because it will only benefit those who are most likely to be able to afford care in the first place and who have already used the existing generous Isa allowance.
‘In addition, it will just add to the growing confusion that has surrounded Isas for the last few years. Each new product added to the range has undermined the simplicity of Isas.
‘The original concept of Isas has not been broken so it does not need fixing. They should still be used to save for your future, whether that is for a deposit for your home, income in retirement, providing for your grandchildren or paying for additional care.’
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