Is a Care ISA necessary?

Elderly lady with carer

Did you know that the amount in a typical Individual Savings Account (ISA) will pay for just 39 weeks of care? With more people expected to be dependent on care in the future, the government is looking for ways to fund the necessary services. One solution that’s been put forward is a Care ISA.

Care and the cost of it have become hot topics in politics and the press recently. We’re increasingly being urged to save more with potential care costs in mind, as the government also looks for ways to support state-funded care.

It’s an issue that’s partly arisen due to increasing life expectancy.

In 20 years’ time, the number of adults over the age of 85 needing round the clock care will almost double to 446,000, according to research from Newcastle University. The number of over 65s needing 24-hour care will rise by more than a third, reaching the one million milestone by 2035.

The figures are just the tip of the iceberg too. There will be many thousands more in their later years that don’t require constant care but do need some level of support. It’s likely we’ll be reliant on a form of help at some point, even when living independently in our own homes. While this may be able to come from family and friends, it’s not always possible. It’s also important to remember that circumstances can change.

Despite the realities of care, many of us aren’t saving for it. And the associated costs may be far more than expected.

For retirees that require residential care, the average bill in the UK is £31,200 annually, according to PayingForCare. If nursing is needed, you can expect that figure to rise further to £43,732. The average sums vary significantly between regions too, with the highest costs found in the South East.

With this in mind, the average ISA savings of £24,000 will fall considerably short if individuals need to pay for all or even a portion of their care. It means that the average ISA amount would cover just 30% of the bill for a typical 130-week residence in a care home, according to research conducted by Just Group.

You will usually have to contribute to your own care home bills, either wholly or partly, until your assets are depleted to £23,250. Even if your capital and income fall below the £23,250 threshold, you may still need to contribute to some fees but could get help from your local authority.

Not planning for the potential cost of care could cost you your property and other assets, including those you’d planned to leave behind for your loved ones.

The proposed Care ISA

In a bid to close this growing gap, it’s been reported that the government is considering proposals to launch a Care ISA (Individual Savings Account).

It’s suggested that a Care ISA will allow individuals to build up a pot that’s earmarked for covering potential support needed in later years. This ISA would have its own allowance, that would be capped at an amount that would reflect standard care costs. As a result, you’d be able to add funds to a Care ISA while still maximising the combined tax-free annual £20,000 limit for other ISAs.

The catch is that you wouldn’t be able to withdraw the money for other purposes, it would be ringfenced for care. Crucially, where the proposed Care ISA would be attractive is when considering Inheritance Tax (IHT).

With other ISA products, the amount held in the account can only be passed on tax-free to a spouse or civil partner. It’s suggested a Care ISA, on the other hand, could be passed on to anyone and will be immediately outside of the deceased’s estate for IHT purposes.

It’s a strategy that aims to encourage savers to put more away for care, safe in the knowledge that if it’s not used it can be passed on as part of their legacy.

While a Care ISA could be an attractive product for some, it’s led to criticism too. Notably, there have been those that have pointed out the IHT advantages are unlikely to appeal to many. Some estates may not be liable for IHT, as they fall under the IHT threshold.

Currently, the Nil-Rate Band for IHT is £325,000. Additionally, the Residence Nil-Rate Band can be added to this if you’re passing your main home on to children or grandchildren. The Residence Nil-Rate Band is currently £125,000, rising to £175,00 in 2020/21. On top of this, there are many other steps that can be taken to reduce the amount of IHT due.

Of course, the Care ISA is only a proposal at this stage. If you’re planning for your later years, including the potential need for care and IHT, other steps will need to be taken.

You can limit the potential impact the cost of care will have on your retirement and inheritance plans by making them part of your financial planning strategy. If you’d like to understand what impact requiring care could have on your retirement provisions, we can help. Using cashflow modelling, we’ll be able to demonstrate how care, and other decisions, can impact your financial future. Get in touch today.