ISAs 

Care Isa proposals branded ineffective by experts

Care Isa proposals branded ineffective by experts

The idea of the government creating a 'Care Isa' to cover the increasing cost of caring for the ageing population has been dismissed by experts, who warn it will only serve "a small minority of wealthy people".

According to media reports, the government is considering the creation of the Care Isa, which would be exempt from inheritance tax, as part of its forthcoming green paper on social care, due to be published in the autumn.

However, Sarah Wollaston, who chairs the Commons Health and Social Care select committee, has dismissed the idea, arguing it "won’t solve the care crisis at all".

She said: "There is no pooling of risk. It only ‘solves’ it for a small minority of wealthy people who can afford to invest and whose families benefit from paying lower tax on their inheritance if not used for care."

According to the proposals, the Care Isa would have an allowance on its own, up to a maximum amount that would reflect care costs and the savings would be exempt from inheritance tax regardless of who they are passed on to. Currently, funds held in Isas are subject to inheritance tax in case of death.

Sir Steve Webb, director of policy at Royal London and former pensions minister, is also against the product.

He said: "It is very difficult to see how a care Isa would make a meaningful contribution to tackling the social care funding crisis. 

"The latest figures suggest that 19 out of 20 estates pay no inheritance tax, suggesting that an IHT break would be irrelevant for most savers."

Sir Steve also argued that "care costs can vary hugely between those who run up six figure bills after extensive residential care, and those who face negligible costs". 

He added: "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. 

"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."

Former pensions minister Baroness Ros Altmann however, backed the idea of creating a Care Isa, as a part of several proposals to be developed by the government.

She said: "The issue of care funding is so enormous, there cannot be just one solution - many measures will be required. This is a major failure of social and economic policy and the green paper will need a range of proposals. Care Isas should be one of them."

According to figures from HM Treasury, quoted by Baroness Altmann, people over 60 years old have more than £300bn in Isa savings, with an average holding of £35,000-£40,000 per person.

She said: "Currently, any Isas that are not spent before someone passes away, could be taxed at 40 per cent, so there is an incentive to spend them before death."