‘The care Isa is a nice concept but people don’t have the money’
A35-year-old who started paying into the Government’s proposed “care Isa” would need to save almost £4,000 a year to have enough to fund care by the time they retire, according to analysis carried out for Telegraph Money.
Last weekend The Sunday Telegraph disclosed that ministers were considering a new Isa to help fix the care funding crisis. Savers would put money away as with any other Isa but, if social care was not needed, the account could be passed on free of inheritance tax.
The Government is due to unveil its plan to fund social care this autumn, which is likely to include a total cap on costs. Currently, families can be forced to pay hundreds of thousands of pounds in care costs if their total assets exceed £23,250 (or slightly more in Scotland and Wales).
The care Isa has been lauded as a potential fix. Yet calculations by pension firm Aegon for Telegraph Money show that the payments would be challenging for all but the very wealthy to achieve.
For the projections we assume that the Government implements a cap on care costs of £150,000, which rises each year in line with inflation. We assume an average rate of inflation of 2.5pc and that the Isa is invested and grows by 4pc a year. Annual contributions also increase in line with inflation.
Even someone who starts as early as age 20 would need to pay in £2,245 a year over 45 years to have saved the required amount by the time they turn 65. Few 20-year-olds will have several thousand pounds a year spare to save into an Isa specifically for care.
Someone who started saving at age 25 would have to put away £2,745 annually. Contributions would rise to £3,264 a year for someone starting at age 30, £3,950 at 35 and £4,940 at 40. Those who started even later would need to save increasingly large sums to hit the cap and cover their care costs. A 55-yearold would need to save a massive £13,836 a year – and after the age of 58 the required amount would exceed the £20,000 limit savers can currently pay into an Isa.
This pot would purely be used for care, so people would need to make these payments on top of regular pension contributions and any other savings plans.
Steven Cameron of Aegon said he favoured a pension-based solution, whereby savers could “ring-fence” a portion of their pension for care, only dipping into it if they struggled towards the end of their lives.
These contributions would also benefit from tax relief, which turns 80p put into a pension into £1 for a basic-rate taxpayer.
Steve Lowe of Just, a pension firm, said it was unrealistic to expect people to pay into an Isa on the off chance they might need care. He said: “The care Isa is a nice theoretical concept but it’s not how humans behave. You can see how it could help but people don’t have those sums of money.”