Retirement blind spot
A common oversight could leave savers facing a “later-life financial crisis”.
Very few people who are drawing an income from their pension savings are taking steps to protect their financial security, according to new research from Zurich.1 The study found that four in five UK retirees using income drawdown to access their defined contribution pension have so far failed to take out a lasting power of attorney (LPA) – meaning their retirement savings could be left in limbo if they were unable to look after them.
An LPA is a legal document in which an individual authorises another person, or perhaps more than one person, to make decisions on their behalf if they lack capacity at some time in the future, or no longer wish to make decisions for themselves. In cases where LPAs are not in place, family members can be left struggling to gain access to funds needed for the individual’s care, and those in a vulnerable position may be forced to take actions that prove costly in terms of their health and wealth.
Zurich’s findings highlight the scale of an issue which has emerged since the government scrapped rules compelling people to buy an annuity at retirement. Under the terms of an annuity, a fixed income is guaranteed for life, so incapacity is not such a risk as there are no further decisions to be made. Drawdown, on the other hand, requires individuals to monitor, review and change investment choices and income levels to meet evolving circumstances. It’s therefore vital that those individuals take out an LPA to ensure that a third party can make decisions on their behalf, should they fall ill or lose mental capacity.
“Registering an LPA has become even more important since the pension reforms. Thousands of people are now making complex decisions on their pension into old age, when the risk of developing a sudden illness or condition such as dementia increases. Despite this, many are unprepared for a sudden health shock or a decline in their mental abilities,” says Alistair Wilson, a savings expert at Zurich.
“With more and more people moving into drawdown, this is creating a ticking time bomb that could leave thousands of people facing a potential later-life financial crisis,” he adds.
In truth, an LPA is relevant whether funds are residing in the main pension or have been moved to drawdown. Having an LPA in place can, for example, allow the attorney to adjust the underlying investment choices, disinvest some of the pension to pay for care, and create or amend an expression of wish for death benefit payments. In cases where funds have been designated to drawdown, the selected attorney may wish to adjust the level of income being drawn, or stop income payments altogether. Without an LPA, a third party would not legally be allowed to instruct an adviser on any changes to a pension arrangement.
Individuals can appoint anyone they want to be their attorney (as long as they agree). This could be a relative, a friend or, perhaps, a lawyer or accountant. Many individuals will appoint a professional attorney to act for them precisely because they do not feel that their family or friends will be able to make the impartial decisions that are required. Once an attorney is chosen is normally quite straightforward to have an LPA drafted by a solicitor, but the key is to set it up well before you need it.
Of course, LPAs are not just for the elderly; younger people may become incapacitated through injury, accident or illness. Nevertheless, the risk of Alzheimer’s disease and other types of dementia increases with age, so it is essential for those approaching retirement to start planning and having conversations with family members, as well as legal and financial professionals, about what they want to happen in the future. Indeed, making an LPA may help initiate those discussions with family and others.
“Aspects concerning later-life planning are not always easy to approach, but they are vital if future decisions are to be based on a clear understanding of an individual’s wishes,” says Tony Müdd, divisional director at St. James’s Place.
“Sadly, the older you get the more likely you are to lose capacity, through dementia or through some form of physical illness. It is therefore important that people consider the possibility that their retirement savings may become harder to manage in the future,” he adds.
“In theory, and in practice, an LPA is very much like an insurance policy. The hope is that once you make it, you never have to think about it again. However, you know that if the worst comes to the worst, matters will be dealt with.”
Please note that advice given in relation to a Power of Attorney will involve the referral to a service that is separate and distinct to those offered by St. James's Place and is not regulated by the Financial Conduct Authority.
1The study is based on a YouGov survey of a UK sample of 742 people who have moved into drawdown since the pension freedoms were introduced in April 2015. The survey was carried out between 14 December 2017 and 24 January 2018.