The new pension freedom legislation introduced in April 2015 changed how pensions could be drawn at retirement. At the same date new pension death tax rules were introduced.
A combination of these two changes have encouraged more people to look at using an Income Drawdown plan to keep their pension invested and to take the income they need directly from the pension pot.
A suitable Income Drawdown plan could keep the saver’s pension pot intact right up to the time of their death; at which point it can be passed onto beneficiaries. These are exciting changes and ones that open up new and dynamic financial planning possibilities.
However, despite the attractions of drawing one’s pension in this manner, there is one stand-out risk which may, at first, not be obvious.
If a retiree decides to keep their pension pot invested and to draw their income from the pot, right the way through retirement, there is a growing risk of the retiree running into health problems, becoming physically incapable and/or losing their mental capacity – whilst their pension is still invested, producing income and requires “managing”.
For example, the statistics around dementia are sadly quite stark. A significant proportion of older people will, based on current health figures, suffer with dementia before they die. Clearly this is just one of many health risks that could affect physical or mental capacity.
It is the loss of an individual’s ability to manage their own affairs which gives cause to the risk. Of course this risk is not a new one, it is simply accentuated by the new rules; as it is likely millions more people in the coming years will use Drawdown and keep their pension pots invested until the day they die.
The problem is if they lose the ability to manage their finances, how will the Drawdown be managed? What happens if income levels need to be adjusted (maybe to pay care costs?) or the underlying investments need to be reorganised? How will this decision be made, who will make this decision and how will an instruction be given to the pension company?
These may seem innocuous questions, but they are anything but; because there is a real possibility of difficulties for family members in getting authority to act in these circumstances. Even a spouse can struggle to get proper control over these matters. It can be complicated, timely and can require court intervention.
In the “old days” the situation was not so prevalent because the vast majority of people retiring took out an annuity; where the terms (and income) were fixed for life and/or most people aged 75 or above did not have a pension intact at the date of death.
This really is a situation which has become significant due to the new pension rules.
Fortunately there is a simple but highly effective solution – pension savers can put in place a Lasting Power of Attorney (LPA). This is a legal document which provides for one or more people to make decisions on the individual’s behalf. It comes into effect should the individual become incapacitated and unable to manage their own affairs, at some point in the future.
It is an effective way of managing the risks attached to incapacity of this type.
Indeed it could be argued that it should an essential part of the financial planning process, for any individual entering into Drawdown when they retire.
At the current time it appears there is only a very limited usage of LPAs alongside Drawdown plans, which is a recipe for problems in the future for those who neglect this.
Putting an LPA in place is a sensible step. And every investor entering into Drawdown should ensure they do this.
Any LPA introduced should be professionally written, by a specialist, because it is a document which may need to cover many different situations and used in different ways under different circumstances. The wording of the LPA is very significant and a hastily or inadequately prepared document could fail to achieve the desired effect.
In summary, the new pension rules open many fresh opportunities for those coming up to retirement and looking to draw on their pensions; but the risk of problems due to ill heath during retirement have to be managed. An LPA (properly written) will protect against issues should this ill health cause the individual to lose their ability to manage their own affairs.
At Increase Your Pension we are able to help you put a suitable and correctly worded LPA into place, which will protect your pension.
To look into this further please contact us at http://www.increaseyourpension.co.uk/get-in-touch/Back