Why is a financial Power of Attorney particularly important when in income drawdown?
I have previously written about why it is important to have a Power of Attorney, irrespective of age. I am now going to look more specifically at the importance of having one in place if your pension fund is in drawdown.
First of all, I just want to recap on the basic two options available to take benefits from a Personal or Group Personal Pension plan. Essentially the options fall into two categories, taking a lifetime annuity or taking a drawdown.
A drawdown is a plan which enables withdrawals to be made from a pension. It is very flexible and allows you to pick and choose when any income is taken, however, it is not guaranteed.
A lifetime annuity will pay the recipient a guaranteed income for life, there are various bases upon which an annuity can be established but essentially its main characteristic is that it will continue to pay out an income until death. Depending on the options taken at outset, a level of spouses/dependants income may continue to be payable after death of the recipient.
Under an annuity there is no requirement to review the plan, once it has been set up the options cannot be altered and it will continue for the lifetime of the recipient.
Under a drawdown it is very different as a drawdown policy remains invested so it must be regularly reviewed. The following list shows some of the areas that would need to be considered, although it is by no means exhaustive:
Have the client’s objectives changed over the last year? It is possible the client has inherited some money and so no longer needs the income or alternatively their expenditure has increased, possibly through needing care. The objectives should be reviewed at least annually to ensure the plan and income remain appropriate.
Level of Income
If an income is being taken it should be assessed to ascertain whether it is sustainable. If a too high level of income is being taken it may erode the total drawdown value at a too fast a rate which could mean the fund may not last as long as originally intended.
How have the underlying investment funds performed? If not as expected, does this impact on the sustainability of any income? Have there been any changes within the investment funds that means they are no longer appropriate? Do the investment funds still match the client’s attitude to investment risk?
Attitude to Investment Risk
This should also be reviewed annually, the client’s circumstances may have changed or as the client becomes older, it may be appropriate for less risk to be taken. Bearing in mind recent market volatility, it is imperative a client is in the right risk profile to ensure they have the capacity to deal with any losses.
Have there been any changes in legislation that would impact upon the client or the plan? If so, changes may be needed.
So how does this link to having a Power of Attorney? If a client losses capacity to be able to deal with their financial affairs and are in drawdown, these areas and more still need to be continually reviewed to maintain income levels and/or the drawdown fund value. If a Power of Attorney is in place it means the plan can continue to be reviewed and it could be argued this is even more important due to the change in circumstances. Whilst there is a process for an attorney to be appointed through the Court of Protection, this can take a long time and by the time an attorney is authorised, it may be too late as the fund may have been eroded.
I would urge all clients to put a Power of Attorney in place, it can make things so much easier over time, to ensure a client’s hard earned money is being invested in the most efficient and effective manner and could save close family unnecessary distress at an already difficult period.
At Wingate Financial Planning I specialise in Later Life Planning and helping clients through their retirement. This is achieved by using my expertise in this market and comprehensive cash flow planning. Our cash flow planning system forecasts a client’s financial position going forward and helps to ensure any income that is being taken, is sustainable.