Hundreds of thousands of people are investing pensions without legal protection against falling ill, and exposing loved ones to a costly ordeal to take control of their funds.
Without a ‘lasting power of attorney’ document created in advance, families can find themselves locked out of an ailing loved one’s finances and facing a complicated court process with fees running into many thousands of pounds.
Four out of five retirees who have put their pensions in income drawdown schemes, which require ongoing management of investments, don’t have this failsafe in place, according to new research by financial giant Zurich.
No legal failsafe: Hundreds of thousands of people are investing pensions without getting legal protection against falling ill
It estimates nearly 350,000 people were already in this situation by April this year, and if numbers entering drawdown continue to grow at the same rate there will be going on 1.4million of them by 2025.
You can protect your finances if you become too ill to handle them by appointing someone you trust – usually a family member or friend – to take over by creating an LPA, either independently or by paying a solicitor.
Find out how much this typically costs below, versus the expensive process of your family seeking control when you don’t have an LPA.
Zurich warns the failure of many retirees to arrange this legal protection is creating a ‘ticking time bomb’ that could leave them facing a financial crisis in later life.
It cites figures from the Alzheimer’s Society, which says there are currently 850,000 people in the UK living with dementia, and estimates this could rise to more than one million by 2025 and then double to two million by 2051.
Alistair Wilson, a savings expert at Zurich, said: ‘Registering an LPA has become even more important since the pension reforms.
What is income drawdown?
Drawdown schemes allow you to take sums out of your pension pot while the rest remains invested.
But this involves risk and requires ongoing management to maximise returns, avoid spending your savings too quickly, and limit taxes on your income.
Pension freedom reforms have led to growing numbers of people entering drawdown and shunning annuities, which are unpopular because they are poor value and restrictive.
However, annuities provide a guaranteed income for life with no monitoring or intervention needed during retirement, which makes having an LPA a less pressing matter although still important.
‘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. The time to set up an LPA is well before you need it, and pension providers should be highlighting this to their customers.’
How do LPAs work and what do they cost?
There are two types of LPA, one covering health and welfare and the other finances and property, which allow people to appoint someone else to make decisions for them if they can no longer do so.
You can sort them out by yourself through the Office of the Public Guardian, at a cost of £82 for each one in England and Wales and £77 for each in Scotland.
However, many people use a solicitor to ensure LPAs are set up properly and their wishes carried out if they are incapacitated.
‘The Government does want people to do LPAs online. In my opinion that works well for some people but not everybody. The form is deceptively simple,’ said Fiona Heald, partner on the Court of Protection team at law firm Moore Blatch.
‘If someone does it and it’s done badly, the fees for putting it right are more than if we did it in the first place. Like homemade wills, homemade LPAs are not necessarily a good thing. It looks such a simple form but it is easy to get it wrong and for people not to do what they wanted to do.’
When it comes to solicitor costs, Heald says her firm charges £650 plus VAT for either a health and welfare or a property and finance LPA on their own, or £975 for both.
Lasting power of attorney helps families keep control if illness or accident strikes
Why you need this now and how to set it up. Read more here.
For couples, it charges £1,350 plus VAT for one or the other, or £1,950 for both. People must also pay £82 per LPA to the Office of the Public Guardian on top.
Zurich says: ‘When you have completed an LPA, you should register it by sending it to the Office of the Public Guardian (for England and Wales), which can take up to 10 weeks.
‘You can make changes to your lasting power of attorney even if it’s been registered, or cancel it, as long as you still have mental capacity to make decisions. Charges and processes are different for people living in Scotland and Northern Ireland.’
What happens if you fall ill without an LPA?
Without this vital legal document, families won’t be able to deal with finances like investments in an income drawdown scheme if the holder becomes too ill to do it, warns Zurich.
Instead, you must apply to the Court of Protection, which aims to take 16 weeks but might take up to six months, for the power to step in and help a loved one.
‘Once mental capacity is lost, it’s too late. Then courts will be involved in deciding on deputies to manage the persons affairs – this may not be who the person wanted it to be,’ says the firm.
‘A deputy is usually a family member or someone who knows the person well. A deputy can make decisions about someone’s person’s personal welfare, property and financial affairs.
Alistair Wilson: ‘Many are unprepared for a sudden health shock or a decline in their mental abilities’
‘If there’s no friend or family member who is suitable or willing to act as a deputy, the Court of Protection can appoint a professional like an accountant or solicitor from a panel. Sometimes, two or more deputies are appointed. They can be asked to act together in all matters.’
You can apply to the Court of Protection without a solicitor, but Zurich says it is a complex and costly process if you are not sure what you are doing.
The court fees are £400 for each deputyship – health and welfare, and property and finance. You also need a medical certificate, which can cost up to £300.
If the court wants to hold a hearing before making the decision it costs a further £500, although these are rare.
After that, if you are appointed a deputy you need to pay a £100 assessment fee if you’re new to the job. And you must pay an annual supervision fee depending on what level of supervision your deputyship needs.
It’s £320 a year for general supervision and £35 a year for minimal supervision – the latter applies if you are managing less than £21,000.
If you make an application to become a deputy on behalf of someone you know via a solicitor, the basic fixed cost is meant to be £950 plus VAT, but Heald says in her experience it can work out at £1,250-2000.
The annual fixed cost of a professional deputy if one is appointed is set at £1,670 for the first year and £1,320 for each year after that, but again Heald says it can be higher.
If a professional deputy is taken on, they would also have to consult a financial adviser to make investment decisions about a pension drawdown scheme, such as how much income to take and the tax implications, which would involve further cost.
Heald says the court fee of £400 and cost of the medical certificate is payable upfront, but other solicitor costs are only taken out of someone’s funds after their deputies are appointed.
Can you still create an LPA after falling ill?
This depends on someone’s mental capacity. Lawyer Fiona Heald explains that even after someone is diagnosed with Alzheimer’s there is often still time to set up an LPA, although the process might be different from what happens when someone is still healthy.
For example, a solicitor might make a home visit, and come at a time of day when someone is at their best, she says.
‘I need to be happy that they understand what they are signing. They don’t have to remember what they are signing, but I need to be happy that they know what they are signing, how it works and what they wanted doing. They need to understand at that time.’
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