How would you pay for old age care?

Ed Monk
Ed Monk
Fidelity Personal Investing21 August 2018

It’s a question that a growing number of us will have to answer - how will we pay for care in later life?

It’s a question that the Government is asking too, as the reality of an ageing population becomes clearer and politicians weigh up various potentially very expensive and politically very difficult remedies.

The problem is that long-term care in old age, whether it takes place in a person’s own home or a care facility, is very expensive and too much even for quite wealthy people to be able to afford. At the same time, the number of old people is rising as the giant ‘baby boomer’ generation ages and fragile public finances struggle to cope.

One more proposed remedy was put forward this week - a ‘Care ISA’ which would be a home for money saved with the express purpose of paying for care. If that money isn’t needed it could be passed on at death without any Inheritance Tax (IHT) being due.

Advocates of the idea say that the Care ISA would remove the incentive for people to spend ISA money earlier in their lives because it gets taxed when they die, thereby leaving it intact to pay for care if necessary.

The idea has been criticised on many fronts. First, the prize of avoiding IHT is only actually relevant to a small minority of people because only a small minority of people - 4.2% of estates at the last count - pay IHT. In other words, a Care ISA wouldn’t make any difference in 95.8% of cases.

Secondly, spouses can already inherit ISA money without IHT to pay, which means the Care ISA incentive would only be relevant for money earmarked to go to people other than spouses or civil partners.

Thirdly, a similar IHT tax break already exists for property wealth because spouses can share their unused nil-rate band for IHT, as well as a special ‘main residence’ nil-rate band. (Read more about those here). This means that by 2020/21, £1m of property wealth will be able to be inherited with IHT due. Is yet more shelter from IHT - which only the wealthy will benefit from - really necessary?

Given all these objections, it’s not clear that the Care ISA has much of a future.

But that still leaves the question - how would you pay for old age care?

Below are some key points to bear in mind in relation to care costs and the current system for publicly-funded care. It’s a complex system so I recommend the online resources at age.uk for a more comprehensive guide to the rules.

  1. There may be help available if you need care in old age but it will depend on where you live, your circumstances including your wealth and the precise nature of the care you need. These things will be established in a ‘care needs assessment’ carried out by your local authority. The care needs assessment will establish whether you need residential care in a home, or can remain at home and receive care there.
  2. If you need care, the local authority will carry out a means test to determine how much financial assistance you are entitled to.
  3. If you do not need care in a home, the means test will take account of income and savings but not the value of your home. If you need a home, the value of your property may be included.
  4. The means test will establish a cash figure for your capital. If this capital exceeds £23,250, you must pay your fees in full. Capital of between £14,250 and £23,250 means you’ll share the cost with the local authority and capital under £14,250 means the local authority will pay the whole cost.
  5. The means test will also look at income so that, even where individuals paying all or most of the care costs, a minimum income is left over. This is £24.90 a week for those being cared for in a home, and £189 a week for those getting care at home.
  6. If you need to move to a care home, your home could be included in the means test. If it is, there is a chance you will have to sell it to release money that you need to pay for care - but there are significant exclusions that reduce instances of this. If your care needs are likely to be short term, your home won’t be included. If your partner is still living at the property, it won’t be included. There are similar exemptions for children under the age of 18 and other relatives if they are disabled.

Important information

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.

Get your money working harder by bringing your pensions together

Plus earn £20 to £1,000 cashback. Exclusions and T&Cs apply.