The growing cost of later life care is a major concern for many older people. Responsibility for care is divided between local authorities and the NHS. If the need for care is primarily due to an underlying medical condition, it can be funded by the NHS. Increasingly the NHS is concentrating its resources on acute care and individuals needing long term help with daily living are required to use their own income and capital to fund this. For those who have less capital assets,* the local authority is obliged to fund some of the cost of care. Local authority funding levels can often be below the full cost of private residential care and while some residential homes will accept funded residents, many do not. To retain personal choice in selecting a care home, personal funding of all or some of the cost is essential.
The Government is reviewing the provision of care and who pays for what, as both local authority and NHS budgets are stretched by the needs of an ageing population. Ideas which have been floated by Ministers include a new care fund into which workers are auto-enrolled via the workplace and a new Care ISA, giving those who wish to save for this eventuality an extra ISA allowance. The possibility of an added inheritance tax exemption on any funds left over on death has been suggested. Neither of these proposals have created much enthusiasm from the savings industry.
Auto-Enrolment, while successful in getting 9 million more workers to save for retirement, seems to put the entire burden for care funding on those still in work and would pile this on top of housing and childcare costs, education loans and saving for retirement.
A Care ISA has also been rejected as unattractive. It is felt that helping people to save for their general needs in retirement is likely to be more successful than asking them to save for specific purposes, for which they may not require funds. It would also further confuse the ISA landscape and potentially complicate what has been a simple and successful savings regime.
For those entering retirement with surplus income, a good way to plan for possible care costs is to make regular contributions to a personal or stakeholder pension. Non earners, who have not exhausted the lifetime allowance for pension savings, can pay up to £240 per month or £2,880 per annum into a pension up to age 75. HMRC automatically add 20% tax relief, so that £240 becomes worth £300 and £2,880 becomes £3,600. Higher and top rate taxpayers can also claim back tax relief of a further 20% or 25% via self assessment.
Invested pension funds pay no tax on growth or income in the fund. Up to 25% of the accumulated fund can be withdrawn as a tax free lump sum at any time after age 55. Income withdrawals over and above this are subject to income tax at the rate payable when these take place.
The advantage of funding for possible future care costs in this way, apart from the tax relief boost, is that the savings are not restricted to this purpose and can be spent on anything. If there is a fund left on death, this can also be passed on to nominated beneficiaries, free of inheritance tax. Beneficiaries could be anyone the plan owner would like to nominate, for example, a spouse or partner, children or grandchildren.
Investment can be in a wide range of assets, including cash, shares, fixed interest and commercial property funds. If the savings are being made with possible care fees funding in mind, then investing in assets which have the potential to keep pace with inflation is important, as care fees tend to increase faster than general inflation. By paying in monthly amounts the investment can benefit from the smoothing effect of buying shares on a little and often basis.
Ministers do not need to introduce new ways of saving for care fees provision, just making more people aware that they can continue paying into pensions, with the benefit of tax relief, after retirement, would help many do so, without tying their savings to this purpose alone.
Director of Public Policy, LEBC
LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment or product for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest. The Financial Conduct Authority does not regulate tax planning. Tax rates and allowances may change in future.
*The capital assets threshold is £23,250 for England and Northern Ireland, £26,500 in Scotland and £30,000 in Wales.Back to News & Views