Techzone

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 they 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 drawdown, or a combination of drawdown and withdrawals from other savings, over a fixed retirement income. But a period of incapacity could undo that income flexibility, just when they may need it most.

However, a little forward planning can help make sure everything is in place to ensure your client’s 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 them to make decisions in the best interests of your client (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.

The LPA has to be completed and registered while the client still has 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.

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, it could require additional expenditure 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.

And 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 holistic approach to retirement income planning which also involves withdrawing capital from other investments such as bonds, ISAs or collective investments.

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. 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, a client 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.

Having an attorney in place allows greater choice over how the donor’s needs can be met tax efficiently. For example, if the donor was taking a regular withdrawal from their flexible pension, but also had savings in a bond, it may be possible to stop the pension payments, potentially freeing up £18,500 of allowances. These could then be used to take bond gains without a tax charge.

If the client also had savings in OEICs or unit trusts, additional funds could be released such that gains fall within the donor’s annual CGT exempt amount. If still further funds are needed, then the attorney might look towards any ISA savings, or even any available tax free cash from the donor’s pension. In short, there are a number of ways that the donor’s needs can be met.

Being in the right pension

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 for your client, it's equally important that they don't delay putting plans in place to make sure they can achieve them. Leaving the transfer too late can 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.

Preserving the estate

It's not generally possible for an attorney to make lifetime gifts on behalf of a donor who has lost mental capacity without authority from the Court of Protection, even if it's argued that the gifts are to save IHT and would have been something the donor would have done if they were of sound mind.

However, providing for the donor’s needs by making the most of allowances and accessing savings in a favourable order could mean that indirectly there could be more left for the beneficiaries of the donor’s estate.

For example, if the donor is faced with increasing care costs, it may be better to fund these from non-pension savings before accessing pensions. This could be a benefit in three ways:

• Tax could be saved if unused allowances are available
• Assets subject to IHT would be reduced and more could be left inside the pension and outside the scope of IHT
• Ultimately, savings that are taken into account for means testing of care costs are reduced

Therefore, where substantial lifetime gifting is part of a plan to mitigate IHT, this should be done while clients have full mental capacity.

Don't leave it too late

It's still possible for someone to be appointed to manage your client’s 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 £80 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.

(* Source: Which? Magazine)

Summary

It's important to check that everything is in place to ensure that your client’s expectations can be met and that plans are flexible enough to cope with sudden and unexpected changes to circumstances. Only then will attorneys be able to truly act in the best interests of the donor.

While 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.