A power of attorney is needed to keep flexible retirement income plans on track
The pandemic has triggered a surge in demand for will writing services as people seek to ensure their loved ones will be taken care of in accordance with their wishes should the worst happen.
But it’s also important people consider their own circumstances and how their income and other needs will be met, particularly if health fails and mental capacity is lost. Many retirees are opting for a flexible retirement income using pension income drawdown, or a combination of drawdown and withdrawals from other savings, over a fixed retirement income such as annuities. But a period of incapacity could undo that income flexibility, just when people may need it most.
However, a little forward planning can help make sure everything is in place to ensure your changing needs can be met by having the right pension, and a power of attorney in place.
Power of attorney
When the flexibility of pension freedoms is needed most, it may not be immediately available unless a power of attorney has been put in place.
A Lasting Power of Attorney (LPA) is available in England and Wales and allows a client to nominate someone to look after their financial affairs if they’re no longer able to. This allows the attorney to make decisions in your best interests (often referred to as the ‘donor’ – i.e. the person who has created the power). This includes starting, stopping or varying pension withdrawals, as well as being able to make withdrawals from other savings such as investment bonds, personal portfolios or ISAs etc.
The LPA has to be completed and registered whilst you retain the capacity, but that little bit of forward planning can make a huge difference to loved ones by ensuring that income can be varied and that care costs can be met when needed most.
The equivalent document in Scotland is a ‘Continuing Power of Attorney’ (CPA), and in Northern Ireland it is an ‘Enduring Power of Attorney’ (EPA). Both are similar to an LPA in aims, but slightly different in how the powers are actually given.
Keeping income flexible
The onset of ill-health can drastically change retirement income needs. For some, as they become less active, they may need less income to live on. At the other end of the scale, additional expenditure could be needed to make adaptations to the family home or even the need to enter residential care.
The increased flexibility of drawdown, means that more decisions need to be made throughout retirement. Income levels may need to be monitored to keep them sustainable, or simply varied to meet changing needs or circumstances such as increased health care costs.
To ensure that needs are met in a tax efficient way, being able turn on and off pension withdrawals is a huge advantage, particularly where it forms part of a wider comprehensive approach to retirement income planning, which also involves withdrawing capital from other investments such as bonds, ISAs or collective investments etc.
Making the right choices
The absence of a registered power of attorney when needed can mean that there is little flexibility when it comes to meeting the donor’s income requirements, as It may not be possible to start, stop or vary pension withdrawals from a flexible pension. It may also mean that other lifetime savings are not accessible. As a result, people may not be able to make the most of their tax allowances and end up paying more tax than necessary. In turn, this could mean that savings don’t last as long as they might otherwise.
Clearly, it’s much better to get pension savings into the right scheme before health becomes an issue, as not all pension schemes can offer the full range of income and death benefit options.
If these flexibilities are important aims, it’s equally important that people don’t delay putting plans in place to make sure they can achieve them. Leaving the transfer too late can also have consequences.
A loss of mental capacity could affect the ability to transfer pension benefits to a new provider. If there is an attorney in place, it may still be possible to transfer if it can be shown to be in the best interest of the donor.
In most cases, a transfer that allows them to take flexible income to meet care costs is likely to be in the donor’s best interest. However, it could be argued that transferring, to improve the death benefits or how they can be accessed is not for the donor’s benefit.
It’s still possible for someone to be appointed to manage your financial affairs after capacity is lost. But this is a lengthier and more costly process. A deputy can be appointed by the Court of Protection (in Scotland the Office of the Public Guardian may appoint a Financial Guardian), who may require regular supervision and to submit accounts to the Court of Protection.
The cost of registering a power of attorney is around £82 in England, Wales and Scotland. In Northern Ireland, the cost is nearly double. This is on top of any fees for legal advice.
Individuals can complete an application themselves, without legal advice. However, care should be taken when submitting as nearly 22,000* applications were rejected in England and Wales for the year to April 2020 – mostly in connection with instructions and preferences stated in the application.
So, in summary whilst it’s perhaps human nature to leave these decisions for another day, acting sooner may save time, money and perhaps a lot of stress in the long run.
For assistance with your Pensions and Powers of Attorney please do not hesitate to contact us, act today don’t delay, would be my call to arms.
Steven P Walker DipPFS APFS
Chartered Financial Planner
(* Source: Which? Magazine)