Care Isa proposals criticised for being overly complicated and only benefiting a minority
Proposals to launch a ‘Care Isa’ to fund social care costs have attracted criticism, with commentators arguing that it would only benefit a small minority of the population and would complicate the Isa system.
The idea for a Care Isa has been floated ahead of the government’s social care green paper due to be published this autumn, according to The Telegraph.
The argument goes that Isas are currently taxed at death, which means that people are incentivised to spend these savings in later life to avoid inheritance tax (IHT).
In contrast, the proposed Care Isa would be designed to secure funding for later life care, with any amount left after death protected from IHT. This could be passed on to beneficiaries tax-free. However, criticism of this policy idea has been swift.
Steven Cameron, pensions director at Aegon, says: ‘A Care Isa might appeal to some people, but would further complicate the Isa brand, and preferential inheritance tax treatment would benefit only a small minority. The trend in policymaking has been to create new labels when many of the solutions already exist.’
Ed Monk, associate director for personal investing at Fidelity, agrees that the proposed solution simply won’t meet the care cost crisis.
‘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,’ he says.
‘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.’
Cameron points out that defined contribution (DC) pensions can also be used to fund care costs.
‘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.
‘Pension contributions also benefit from tax relief on the way in, making it a highly tax-efficient way to save. 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 inheritance tax liability.’
According to The Telegraph, the Treasury is considering allowing people to take money out of their pension fund tax-free if it is used for care costs.
Meanwhile, Cameron’s criticism that a Care Isa could overcomplicate the Isa system chimes with the Association of Accounting Technicians’ (AAT) call for the entire system to be scrapped in favour of an ‘Everything Isa’, as we reported in March.
The AAT’s report stated: ‘There is now an Isa for every day of the week, offering unnecessary complexity, bureaucracy and confusion for consumers.’