The control that pension freedoms have given people over their finances at retirement also means individuals are taking on more responsibility for their funds. People now have to make active financial decisions about their pension pots, and if they opt to go into drawdown, as many more people are doing, instead of buying an annuity, the need to make decisions continues throughout retirement.
However, people are living longer. As well as physical conditions becoming more prevalent, conditions that impair mental capacity are also a possibility with advancing age. For those who lose mental capacity through dementia and other reasons, making investment decisions, and choosing how much income to take, will need to be offloaded to someone acting on their behalf.
A lasting power of attorney is a legal document that enables people to appoint someone they trust to make decisions and manage their affairs on their behalf. The appointment needs to be made when people are of sound mind and can also be made to cover temporary situations – if they are in hospital, for example.
Nobody can be forced to appoint an attorney, but given the complexities of pension arrangements post-pension freedoms, should those in drawdown always have a lasting power of attorney in place? And how do advisers broach the subject with clients?
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Commentators say everyone, not only drawdown clients, would benefit from having an LPA in place. There are two types: one to cover decisions about wealth and property, and another to cover health decisions.
However, unless clients have had personal experience of an LPA for an elderly relative, it is something they tend to ignore because they think they will not need it. Even those who know what LPAs are may not understand the consequences of not having one – applying to the Court of Protection to appoint a deputy, which can be costly and as time-consuming as applying for probate upon death.
Intelligent Pensions marketing director Andrew Pennie says although most people will be aware of someone, young or old, who has become incapable of making their own financial decisions and requires help, the majority will be less aware of the steps required and costs involved where an LPA is not in place.
“People often wrongly assume their spouse or partner will be able to make financial decisions on their behalf if they become incapable, but this is not the case,” Pennie says.
“Without an LPA, an application must be made to the Court of Protection to appoint a deputy. While the costs of setting up and registering an LPA can be a few hundred pounds, the costs of applying to the Court of Protection and ongoing costs of a deputy can be significantly more,” he says.
Making LPAs the norm
Curtis Banks pensions technical manager Jessica List thinks advisers could really benefit their clients by highlighting the role of LPAs.
“It’s natural that people may be concerned at the idea of handing control of their affairs to another person – but the more information that is available and the more we can normalise the idea of having these conversations and putting LPAs in place, the easier it will be,” she says.
Some advisers cover LPAs with clients as part of a broad conversation about wills and estate planning.
Law firm Howard Kennedy partner and head of trusts, tax and estate planning Simon Malkiel says clients who are referred to him by advisers have typically had the LPA discussion as part of a broader conversation about wills and bereavement.
He says most people put wealth and healthcare LPAs in place at the same time, which is useful as there is some crossover.
“If an elderly person is a drawdown client, financial, health and care decisions may be closely related. For example, if assets and pension funds are needed to pay for residential care where the person has lost capacity, there would need to be health and wealth LPAs in place,” he says.
Adviser view: Ricky Chan, director, IFS Wealth and Pensions
We would bring LPAs up anyway, whether clients were in drawdown or not. We talk about wills initially to gauge where they are at, then we ask if there is any LPA in place.
Older clients who would have had elderly parents know what an attorney is and they say ‘I did that for my parents’. We don’t question who they appoint as attorney, but we explain there are safeguards in place – if you still have mental capacity you can revoke power of attorney and they could have two attorneys who could make decisions together.
If they appoint one friend or family member and someone younger, the idea is that, even if one dies, they will still have the other.
A living will
Atrium Financial director Noor Uddin tells his clients about another advantage of an LPA – the ability to choose exactly who handles your affairs. “It’s like a will – a living will,” he says.
“You have to be of sound mind to choose an attorney. If you don’t have an LPA, your family will apply to the Court of Protection, but the court doesn’t know the individual’s circumstances – whether you get on with your brother who is applying to become your deputy, for example.
“You might prefer someone on your wife’s side of the family – your brother-in-law – to make decisions on your behalf, but the court might go with your family.”
Zurich head of retail platform strategy Alistair Wilson and his wife recently put LPAs in place to transfer the responsibility for their affairs to each other, prompted by personal experience of a close relative being incapacitated.
Wilson says sharing personal experiences is one of the ways the financial services industry can encourage more people to appoint attorneys. He is particularly concerned about a lack of awareness about LPAs from people who are taking benefits in drawdown, but do not have a financial adviser.
“If someone taking drawdown receives benefits, it is complex and requires ongoing decision-making. Its fine if they are getting advice, but what if they don’t and are incapacitated?” he says.
When appointing an attorney, clients should be made aware of the responsibilities they are placing on the shoulders of people who may not have any experience of investments and managing assets, let alone the complexities of drawdown.
“It’s not just about appointing someone you trust; it’s thinking about what you are expecting them to do. What you are handing them is a box of drawdown assets that require ongoing attention,” says Wilson.
He adds it is important not to leave it too late, leaving families looking back in hindsight knowing it was something that should have been dealt with earlier.
Adviser view: Mathew Bonney, associate director, wealth planning, Kingswood
Everyone should have an LPA, even younger clients. You need to strike a balance between not scaring clients but posing the importance of it and the consequences of not having it in place.
There is so much the industry could do to educate clients, particularly drawdown clients becoming well versed in how to plan tax-free cash and income.
If someone is 65, they may not be the prime age for dementia but they could be incapacitated by illness such as a stroke. If they’re drawing an income, they’d need someone to take control.
And from a wealth management perspective, if clients have discretionary managers in place, it’s vital to have wording in the LPA enabling them to remain.
The matter of trust
Given the potential for someone with power of attorney to abuse the trust or mishandle the affairs of the person who appointed them, financial advisers need to make clients aware that they must trust those they appoint, and that it does not have to be a family member.
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“I have had a client who nominated their co-worker,” says Uddin. “It’s one thing trusting them at work, but I said to them: ‘have you ever thought about what would happen if they no longer worked there, would you keep in touch? And if it was a neighbour, would you stay in touch if they moved?’”
Uddin adds that as there is a lot of public mistrust in financial services, it can be difficult for some clients to accept advice about something like LPAs when they have come in about another matter.
“They will say something like ‘I’ll think about it’. Psychologically they’re thinking ‘This guy’s just trying to make more money out of me’,” he says.
“But we’re working hard to show that we give good advice and we’re not just in it for the money.”
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Do drawdown clients need a lasting power of attorney? - Money Marketing
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