The individual savings account (ISA), is 20 years old next April, and what was once a simple savings solution is now available in various iterations; to help young people buy a house, to boost your retirement income and – potentially – solve the pressing problem of soaring health and social care costs in later life.
Funding social care is one of the biggest funding challenges faced by the Government as life expectancy continues to increase. The Treasury is believed to be considering a “Care ISA” so that people can contribute towards their later-life care. Much like auto-enrolment was designed to relieve the pressure on the State Pension to provide an income for pensioners in retirement, the care ISA would shift the burden of paying for care from the State to the individual.
Former pensions minister, now head of policy at Royal London, Sir Steve Webb has argued against the care ISA, instead advocating a “care pension”. His successor Baroness Ros Altmann responded on Twitter that a Care ISA “takes advantage of the £300 billion in ISA savings which more than eight million over 60s already have. We need a range of solutions, no one answer can solve such a massive problem”.
If launched, his will add another ISA variant to the current family, which includes the Junior ISA, Lifetime ISA, Help to Buy ISA – which is being phased out – and Flexible ISA.
The Role of the State
Should the Care ISA go ahead, it is likely to be met with opposition from people who say it is the State’s role to look after the elderly, funded by the tax collected through their working lives.
Sarah Wollaston MP, chair of the Commons health and social care committee, says the Care ISA would be a “colossal mistake” and would instead incentivise people to spend their savings to avoid inheritance tax. ISA savings, unlike pension savings, are not IHT exempt.
Savers would be left with the choice of either running down their savings and risk falling short of cash leaving the state to pick up their care costs, or pass on their Care ISA to descendants resulting in a 40% tax bill.
Trouble for the Lifetime ISA
The Treasury select committee has recently stated that the Lifetime ISA, which is aimed at the under 40s and runs parallel to existing pension savings, is too complicated and not popular enough. While the tax bonus of 25% every year from the government has enticed many, the risk of losing this bonus if you withdraw money – unless it’s for a house purchase – has deterred others.
When it was introduced, the government hoped that the LISA would encourage people without pensions to build up long-term savings. But with the existing pension system offering tax relief of up to 40% and having inheritance tax advantages over ISAs, critics of the LISA say that it is not a viable alternative.
Pension Limit to be Lifted?
With the Government’s finances looking in better shape than in recent years – July’s budget surplus was the highest since 2000 – there is some speculation that the current pension lifetime limit could be lifted. But the Government may have other ideas – reform of pension tax relief, which is seen by campaigners as a giveaway for wealthy taxpayers, could finally happen. Removing higher rate tax relief in favour of a flat rate is seen as an easy win for the Treasury as it looks for ways to fund the gap in social care funding. But the Government has dodged this issue at many previous Budget reports.
