Proposed Care ISA: a solution to the long term care funding crisis?

As concern grows over the looming prospect of a radical increase in demand for long term care services, the Government is considering launching a new ISA which will be free from Inheritance Tax (IHT). A Telegraph article revealed that the ‘Care ISA’ is being considered for inclusion in the forthcoming social care Green Paper.

Worries about a potential funding gap for long term care are not unfounded. The demographic bulge as the so-called ‘baby boomers’ leave work and reach old age has raised concerns for decades. This is now coupled with an increase in longevity and especially the length of time that people survive with health issues that prevent independent living. Figures from the ONS census data in 2011 illustrate the potential for an increase in the demand for long term care (see graph opposite source: 2011 Census).

The average cost of residential care is £37,466 each year, more if nursing care is also required. Understandably, this level of spending proves too much for many, especially if the need for care spans a long period.

The ‘Care ISA’ would aim to tackle one reason that people are reluctant to save to provide long term care, Inheritance Tax. The idea that any savings put aside for long term care would be taxable on death puts some off building up a large fund to provide for the eventuality that long term care will be needed in later life.  The Care ISA aims to alleviate this fear.

Former pensions minister, Baroness Altman spoke in favour of the proposals, ‘At last, people may set money aside, in advance, to cover future care costs (currently they do not think about it), rather than suddenly having to find money at the very time they are most vulnerable. Older people’s ISAs may otherwise be spent well before they need care, and they may regret this later but it would be too late.’

Critics of the proposals have pointed out that only 4% of estates have IHT liabilities and that those that do will generally have greater resources to fund long-term care.

Whatever the benefits of a Care ISA, it seems unlikely to provide an effective solution for the majority of those who will need to fund long term care. As Chris Giles, economics editor at FT said on Twitter, “Social care funding requires a risk pooling element…” Certainly, some element of risk pooling would be needed, either through taxation or effective insurance products, to meet the scale of need across the UK population.

Our services