Government plans for a new ISA to cover long-term care costs are a cunning way to get us all saving more and could be a way to escape Inheritance Tax.
Rumours are swirling that the Government is considering introducing a 'Care ISA' to encourage us all to set money aside to cover the costs of long-term care.
It’s one of a raft of proposals currently being considered as the Government prepares to publish a Green Paper on social care.
The country is facing a care crisis as an ageing population means more and more of us are going to end up in a care home, but the money simply isn’t there to pay for it.
You can learn more about covering the cost of care here.
Official figures show that there will be nine million more pensioners within the next 50 years, with the number of people aged over 65 almost doubling to over 20 million by 2066, according to the Office for National Statistics.
This is placing a huge burden on social care where there is expected to be a £5.5 million funding gap by 2020-2021 rising to a £12 billion shortfall by 2030.
“Our creaking social care system has been chronically underfunded for years and will simply not be able to cope with the extra demands [of] an ageing population unless substantially more money is found,” Caroline Abrahams, director of Age UK, told The Telegraph.
Holidays outrank paying for care
Part of the problem is many people simply aren’t setting aside any money for their own future care bills, assuming that the NHS will pick up the bill.
Nine out of 10 people aged over 55 haven’t saved anything for care costs, according to research by Which?. Of those surveyed, more than half said they’d rather spend their money on holidays than save for care costs.
So, how do you encourage people to save? The Government's answer to that these days seems to be by creating an ISA. Over the past few years, we’ve had Help to Buy ISAs, Lifetime ISAs and now a potential Care ISA.
The proposals are said to be that the Care ISA will be exempt from inheritance tax (IHT); the idea being that people would be encouraged to save into it because if the money wasn’t all used for care costs the remains would be passed on to their families tax-free.
“If you haven’t spent your ISAs before you pass away, the money will go into your estate and could be taxed at potentially 40% – so if you have large sums in ISAs, there is the perverse incentive to spend them before you die,” says Baroness Ros Altmann, former pensions minister.
“There is a real danger that those who have set aside these savings will really regret not having kept it for possible care needs when older.”
loveMONEY says: we need to take more responsibility for care costs
Use tax fears to make us save
The Care ISA could be a cunning move by the Government because by offering to waive IHT it could encourage people to save – and cover their own care costs – while also not putting a serious dent in tax revenues.
That’s because far more people worry about IHT than actually end up paying it.
Figures show that 19 out of 20 estates pay no inheritance tax but read any financial problem page and you will see they are filled with letters from people fretting over whether IHT will be due on their estates when they die.
A Care ISA would use people’s own fears to incentivise them to save for something that Which’s survey shows most people don’t worry about – paying for care.
My only gripe with the Care ISA is calling it an ISA. It’s the Government’s go-to name for savings products at the moment and bringing yet another one in that is treated differently in tax terms to other ISAs (which are subject to Inheritance Tax) is only going to cause confusion.
Why not call it a Savings Care Plan or, really utilise the fear of IHT and call it an IHT-Free Savings Scheme? Rather than muddying the ISA waters with yet another tacked-on savings option.