Govt ‘care ISA’ proposal snubbed by experts

The government is considering introducing an IHT exempt 'care ISA' to tackle the social care crisis, writes Hannah Godfrey.

The government is considering introducing an inheritance tax (IHT) exempt ‘care ISA’ to tackle the social care crisis.

This weekend the Telegraph reported the Treasury has been reviewing proposals to include the care ISA in the government’s upcoming social care green paper due this autumn.

Currently, ISAs are taxed at death, meaning there is an incentive to spend savings rather than keep them to fund care.

Government figures provided to former pensions minister Ros Altmann revealed those aged 60 and above have more than £300bn in ISA savings, with average values per pot between £34,000 and £40,000.

Altmann welcomed the proposal, pointing out a care ISA system could have a number of advantages, including forcing people to think about care costs in advance, as well as being able to pass any unused money to the next generation.

“The country cannot cope with the costs of caring for today’s elderly population as more than one million older people who need care are not receiving it,” she said. “There are huge sums saved in ISAs by the older generations. If all this money is spent before people reach later life, the burden of paying for their care will fall more heavily on younger generations.”

There is no “silver bullet” when it comes to tackling the crisis, but a care ISA should be a policy outlined in the green paper, she added.

‘Only benefit minority’

However, other industry experts were less enthusiastic about the plan. Aegon pensions director Steven Cameron suggested it would “further complicate” the ISA brand and only benefit a small minority.

“For many, the most obvious solution is likely to be linked to retirement savings, particularly where individuals have defined contribution pensions,” he said.

“Here, under the pension freedoms, individuals at retirement could notionally ‘ringfence’ or set aside part of their retirement fund to meet possible future care costs, taking an income from the balance.

“If the money is not needed for care costs, the ringfenced amount could be used for other purposes or left to a partner or other beneficiary, which is already usually free of any IHT liability.”

Former pensions minister turned Royal London director of policy Steve Webb said he found it “very difficult” to see how a care ISA could make a meaningful contribution to tackling the social care funding crisis.

“The latest figures suggest that 19 out of 20 estates pay no IHT, suggesting that an IHT break would be irrelevant for most savers. In addition, care costs can vary hugely between those who run up six figure bills after extensive residential care and those who face negligible costs – it would be impossible to know in advance how much to save into a care ISA, with most people saving too much, and some people saving far too little.”

Webb continued: “There would also be issues about whether people whose needs changed could get money out of a care ISA without penalty, and rules would be needed to stop people shovelling money into a care ISA very late in life purely as a form of inheritance tax planning.”

Meanwhile, the lang cat consulting director Mike Barrett took to twitter to express scepticism on the proposed changes: