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Little support for proposed IHT-free Care ISA

30 August 2018

The Care ISA reportedly being considered by the government has received little in the way of support from the industry.

This is despite the proposal that it sit outside of IHT, allowing the cash to be used for care costs or, if not needed, passed on tax free to beneficiaries.

Commentator concerns are that it could add complexity and provide nothing new.

Steven Cameron, pensions director, Aegon, believes that a Care ISA would complicate the ‘ISA brand’ and preferential inheritance tax treatment would 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. Here, under the pension freedoms, individuals at retirement could notionally ring-fence 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,” he says.

For Cameron, the government’s autumn Social Care Green Paper needs to address the issue of how to encourage people to save in advance for their care costs and make clear how much an individual will ever need to pay towards their own care costs so they can plan ahead knowing inheritance is safe.

He continues: “Without this information, and longer term political certainty, it’s difficult to go into detail on specific solutions. Other options include care insurance policies but this would be highly expensive and we don’t believe people would be prepared to pay insurance costs of £40,000 up front just in case they were ‘lucky enough’ to need care. The other main contender is equity release, which needs to be looked at as a solution to those who may be property rich but income poor.”

National adviser group LEBC also agreed there is no need for a further ISA product in the market.

Kay Ingram, director of public policy, LEBC Group, explains: “An IHT exempt fund which can be designated for care costs or left to family tax-free is a perfectly good idea. (However), pension savings already allow the saver to designate part of their funds for later life care and if they don’t need the funds to that end, the saver can leave their pension fund IHT-free to a nominated person.”

Given that as many as 80% of all ISA funds are invested in cash, Ingram believes this would not be suitable for longer-term care needs.

“The real value of cash accounts is constantly eroded by inflation, with the cost of care fees year on year well ahead of inflation. Money set aside for this purpose needs to be invested in assets which can at least keep pace with but preferably exceed inflation – an equity linked ISA perhaps.”

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