Lasting Power of Attorney helps keep you and your money safe as you age

Those who have opted to put their pension savings into drawdown would be wise to have an LPA in place, argues Steve Webb.

One of the great attractions of pension freedoms is that they enable people to make choices about their pension savings that are tailored to their individual situation. Those who want to lock in to a guaranteed income for life by buying an annuity can still do that, but those who want more flexibility, perhaps taking a cash lump sum and managing the rest through their retirement, can do that if they prefer.

However, while we may make good choices in our late 50s or 60s, perhaps supported by free PensionWise guidance from the government, it remains less clear that we will all be well-placed to make good choices as we get much older. In particular, we need to prepare for the time when our own mental capacity, or perhaps that of elderly loved ones, declines, either imperceptibly or more suddenly.

- Eight in 10 have no Power of Attorney in place: here are the pitfalls
- Making a will in lockdown: what better time to get the job done?
- Why is Lasting Power of Attorney such a big deal?

Decision time

One option for those in drawdown to consider is setting up a Lasting Power of Attorney (LPA). The LPA is a legal document that allows you to appoint people to make decisions on your behalf.

Having an LPA in force means that if you have an accident or illness that may prevent you making your own decisions, it is those who you know and trust who are making them on your behalf. According to the most recent annual report from the Office of the Public Guardian (which oversees the LPA process), there are now 3.8 million powers of attorney in force in England and Wales. A similar but slightly different process applies in Scotland.

It remains a concern, however, that many of those who have opted to put their pension savings into drawdown may be doing so without an LPA in place. This exposes them to a number of risks.

Scam warnings

The first is the ever-present threat of scammers. While most of us think we are too smart to fall for a scammer, the evidence is that no one is immune, especially given the highly convincing techniques scammers use to appear genuine.

One of the downsides of pension freedoms is that thousands of people have easy access to large amounts of capital from their pension, which wasn’t the case in the days when most people exchanged their pension pot for an annuity. As we get older, the risk of being scammed increases, as does the need for help in making the right decisions.

- Coronavirus scams are on the rise: what to watch out for

The second risk is that we may simply not be aware that we are not as sharp as we used to be. Cognitive decline is often gradual and imperceptible from day to day, so we can easily convince ourselves that we are as sharp today as we were decades ago. But the harsh reality is that our abilities decline with age, and as a result, we are at risk of making poor decisions about our finances.

Of course, many older people are still capable of managing their money, but the danger comes when we assume that slowing down is something that happens only to other people.

A less common risk – but more serious when it happens – is when you suffer a sudden illness or incapacity that means you are suddenly unable to make choices about your pension savings. If you have planned ahead and appointed attorneys, there is someone ready and able to make decisions in your interests and on your behalf. A power of attorney should make it much easier for your loved ones to deal with financial institutions as your representative.

There are options if things go badly wrong and there is no LPA in place. A friend or family member can apply to the Office of the Public Guardian for a one-off power to make a single important decision, or to become a ‘deputy’ to make ongoing decisions on your behalf. But this is a relatively slow and bureaucratic process, and is much more onerous on your friends and family than if you have nominated them as an attorney.

These are problems few of us want to think about, but pension freedoms mean many more of us will be making difficult financial decisions further into old age than ever before. It makes sense to ensure others around you can help ensure those decisions are taken in your interest, if you are no longer able to make them for yourself.

Steve Webb is a partner at pensions consultants Lane Clark & Peacock.