Care ISAs and incentives for care saving
2 February 2015
- Government considering savings incentives for social care
- Possible ways to incentivise care saving schemes: 1. Care ISA 2. Tax free pension withdrawal 3. Care saving in auto-enrolment
- Could help millions of middle income families not just the well-off
Government must tackle lack of care funding: Are Ministers finally waking up to the need to help people save to pay for social care? I do hope so. It seems they may be considering savings incentives, to help people prepare for potential care bills for themselves or their loved ones. Estimates suggest that around half the population over age 65 will need to spend at least £20,000 on later life care, and one in ten will spend over £100,000.
Insurance unlikely, need to encourage savings: Insurance companies cannot offer an insurance solution to cover care costs, so private savings must form part of the solution. With an aging population and rising longevity, it has long been clear that increasing numbers of older people will need care. Yet there is no money set aside by the state or in private savings to cover care costs. Obviously, using a family home is a possibility, but many would prefer other means.
Care ISAs and tax free pension withdrawal could help kick-start care savings culture: How can we help families start to plan care savings? Tax-free ISAs are a simple and popular form, but most people do not have specific spending plans for their ISAs. A ‘CareISA’ in the Chancellor’s final Budget would not involve upfront tax relief as with pensions. Launching a CareISA specifically earmarked to pay for care would itself help people realise the need to save for care and help kick-start a care saving culture that currently does not exist. In addition, allowing people to spend their pension money on care without paying tax first would also encourage more to keep money for later life as well as signalling the need for care saving plans.
Making a CareISA work – IHT free? A separate annual allowance for a ‘Care ISA’ of perhaps £10,000 a year, maybe with a lifetime maximum of £100,000 contributions would be an excellent measure for the Chancellor’s Budget. Transferring money from other ISAs into a CareISA could also be allowed. The money could only be spent on approved care provision (but it could cover care for a loved one as well as paying for moderate or preventive needs because such early intervention might help save money for the NHS). To increase the attraction of CareISAs they could be exempt from inheritance tax. Just as with pensions, they could then be passed on to future generations as a Care Savings plan. This could finally begin the process of planning in advance for care funding. Within any one couple, there is a 50/50 chance that one will need care, in a family of four, one is likely to need care but no money is set aside. Saving among family members would make sense if they wanted to, rather than each individual.
Tax free pension withdrawal to pay for care: Alongside a new Care ISA, the new pension freedoms could also be used to encourage people to save money for later life care by allowing any money taken out of the fund for care needs to be withdrawn tax-free. Removing the annuity requirement and 55% death tax could encourage pension funds to be kept to cover family care costs. Allowing some pension fund withdrawal to be tax free if it is used to pay for care, would encourage more people to retain some funds in the tax-free pension for longer, just in case it is needed. If they don’t spend it on care, it will pass free of inheritance tax to the next generation.
Auto-enrolment to encourage workplace care saving plans: Ultimately, there is another route to help care funding, especially for those without large savings. We certainly need a range of options to solve a crisis on this scale. With auto-enrolment potentially bringing every worker into pensions for the first time, there is an opportunity to use this to start funding social care too. The Government could eventually adjust auto-enrolment to cover more than pensions, or even build a national care insurance contribution into auto-enrolment too.
Bringing Care Savings into workplace flexible benefits packages: In the meantime, there would be merit in encouraging employers to offer workplace savings plans specifically for care, such as the CareISAs. This could be part of a flexible benefits package, with an employer contribution to help workers of all ages and income levels save up for care costs.
No magic bullet – urgently need range of options so public know they need to save: The cost to society of failing to ensure money is set aside for future social care needs will put intolerable burdens on the NHS, on younger generations and on older people. There is no magic bullet to solve this crisis – we’ve left it so late. The best we can do is start to tell people that the state won’t pay, help them realise just how little the state covers and that they are likely to need their own funding as well. Whether it’s ISAs, pensions or auto-enrolment, the Government must incentivise saving for social care and this can ultimately help millions of middle-income families, not just those who are well off.