Funding care home costs with a care home ISAIt’s one of the scary things about growing old, isn’t it? We’re all living longer, thanks to medical science but does that mean more of us are going to end up in a care home, struggling to find the means to pay for it?
A year in a care home can cost more than £50,000. This means some families are accumulating huge bills. If you have assets of more than £23,250 (slightly more in Scotland and Wales), the law states that you must fund all your care costs yourself, without any help from the Local Authority. This figure includes property, so if you have your own home, you won’t be eligible for any support.
As a result, many families are finding themselves facing a significant gap when it comes to funding care for their loved ones. This added financial burden comes at what can often be a sad and stressful time anyway.
One way some families are funding the cost of care is through the value of their home; equity release or a lifetime mortgage, as it is sometimes known. This allows anyone over 55 to borrow against the value of their home. You can draw money to about 50% of your property’s value and there are no monthly repayments. The interest rolls up at a compound rate until the person borrowing the amount dies. To protect you, the total debt can never exceed the value of your home and will be cleared from the eventual sale of the property.
It’s worth noting that interest rates tend to be higher than standard mortgages but there are no affordability checks or repayment plans. You can decide whether you take the money as a lump sum or in stages.
There are different ways of using equity release. Most people would prefer to stay in their own home for as long as possible rather than move into a home, so one option can be to use the money to make home improvements and adapt the property to their needs as they grow older. Installing a wet room or a moving a bathroom downstairs, for example, can often be practical solutions.
It is more difficult to use equity release to fund care home costs. In fact, according to a Daily Telegraph survey in 2017, only 1% of respondents gave that as a reason, compared with debt repayment, inheritance gifts, home improvements or to boost disposable income. The complexity stems from the fact that the repayment of the loan is often triggered by the very act of someone moving into long-term care. If one half of a couple, however, needed to go into a care home, it does mean that the property would not need to be sold to repay the debt until their partner died or moved into the home with them.
It’s obviously difficult to predict the length of someone’s stay in a care home so equity release may not always be a straightforward decision but, in some cases, it can be a useful option for quick, upfront funding.
Funding care home costs with a care home ISA
Wednesday, September 19th, 2018If you’re under 60, funding your future care might not be top of your agenda. Garden improvements, good restaurants and holidays probably rank slightly higher, as well as saving for your pension if you’ve not yet retired.
However, the government could be proposing a new ISA in order to encourage people to start saving for their later life care. Recent leaked government documents suggest that the government is considering a Care ISA as part of its forthcoming green paper on social care.
The Care ISA would have a tax free allowance of its own that reflects the cost of care. Any leftover savings from this ring-fenced amount would be safe from inheritance tax when you die.
The high cost of later life care is something that looms for many of us.
Currently, those in England and Northern Ireland who have assets of more than £23,250 will be expected to self-fund their care completely. This can mean selling the family home and spending a chunk of your savings on funding care.
Councils are becoming increasingly ruthless in cracking down on people who deliberately deprive themselves of assets by giving them away. There is no time limit on how far a council can go back when claiming deliberate deprivation.
A Care ISA would mean that, if a saver comes to need later life care, more of their assets would be protected.
However, the Care ISA has been widely criticised by both providers and financial commentators.
At the moment, people can leave £325,000 and, from April 2020, couples with children and property will be able to leave £1 million jointly. Much of the population dies with less assets than these. So, for many people, an inheritance tax break isn’t relevant, which could limit the Care ISA’s uptake, making it unattractive for providers to offer it. They may prefer to take advantage of other products, such as a pension, because they offer immediate tax relief.
Additionally, financial services firm Hargreaves Lansdown suggest that only one in four people ends up paying for long term care costs, making the Care ISA even more unattractive.
This means that providers are unlikely to see the Care ISA as a significant business opportunity. The upfront costs of implementing the niche ISA could make it unprofitable.
What’s more, it is unclear how the government would clamp down on the tax loophole that will emerge if savers pay for their care from funds outside of the Care ISA and use the ISA as an inheritance tax exempt savings fund.
The abundance of negative feedback means that the Care ISA may well remain the stuff of fantasy for the treasury.
Tags: care, ISA
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