August 2007

Power of attorney

Powers that be

When it comes to explaining exactly what the term power of attorney means many people draw a blank. However, despite this confusion it remains one of the most important parts of retirement planning and more work needs to be done to ensure people take advantage of the benefits it offers.

Power of attorney effectively grants power to another person or group of people to deal with someone's financial affairs if they are unable to do so themselves. It can be used in a variety of situations - if someone knew they would be out of the country for some time for instance they could grant power of attorney to the person of their choosing for a defined period of time. However, it also exists to protect people if they become mentally incapable of making informed decisions about their finances. Having a power of attorney in place at such a time can avoid much upset and delay by enabling designated people to make decisions on your behalf. This could include releasing money to pay for a care home better suited to the person's needs for instance.

"There's always a risk that a health issue will crop up and there needs to be something in place in advance to allow continuity in that person's financial affairs," says Julie Hutchison, estate planning specialist at Standard Life. "However, as a rule people aren't very aware of power of attorney. It's an extremely important document and I would recommend people have one drawn up as soon as they buy their first home."

While undoubtedly important, it is true to say that many people don't take advantage of this valuable tool. Standard Life research in 2006 showed that 74% of people had not made plans for someone to deal with their financial affairs if they became incapable. The very nature of power of attorney means it should be set up in advance as by the time it is needed that person may already be incapable of making an informed decision. The possible consequences of allowing such a situation to continue are potentially shattering with the person in question perhaps making decisions detrimental to their financial security.

"Without power of attorney it can become difficult to provide the practical assistance needed to help an elderly relative," says David Marlow, marketing director at Alexander Forbes. "For example where care is required for an elderly relative - if they haven't appointed anyone to deal with their affairs then how can that care be supplied? How can the younger generation help if they can't spend that person's money, even if it is for their own benefit?"

The reasons why someone would not have a power of attorney in place are complex and the fact is that many people do not want to think about a time when their mental capacity could be diminished. In addition there are many misconceptions as to what power of attorney actually does.

"There are two main areas of confusion," says Geoffrey Shindler, partner at Lane-Smith & Shindler. "Firstly many people seem to think power of attorney currently covers healthcare as well as financial which it doesn't. Secondly people tend to think the attorney runs their financial affairs from the point the power of attorney is drawn up. This simply isn't the case."

Changes to power of attorney

However, there are changes afoot. The current power of attorney used in the UK is called enduring power of attorney (EPA) and this relates to the person's financial affairs only. However, under the Mental Capacity Act 2005, from 1 October 2007 enduring power of attorney will be replaced by lasting power of attorney (LPA) which gives people the option to give designated people the power to make welfare decisions on their behalf. From October no new EPAs can be set up though existing EPAs can be registered after that date.

In addition to the expansion of powers a LPA can give there are also several differences. The extra responsibilities granted under a LPA mean that the paperwork involved is more lengthy and complex. In addition, while EPAs can be drawn up many years in advance they are only registered in the event of that person's incapacity. However, LPAs are required to be registered at the outset which incurs a fee as well as an extra administrative burden.

"I do have some slight concerns with the practical aspects of cost and paperwork," says Hutchison. "Lasting power of attorney is a lengthy document and there is a separate registration fee."

The situation has caused something of a surge in popularity as advisers urge their clients to take out EPAs before the October deadline. "It's an opportunity that all advisers should be aware of," says Hutchison. "It's almost a case of buy now while stocks last."

Issues for the adviser

Despite this current increase in popularity it still remains the case that many people enter retirement with no power of attorney set up. While the organisation of such a document is the role of a solicitor what can advisers do if they feel that a client may be starting to suffer from impaired mental faculty?

"I would hate to give advisers prescriptive rules as to how they should deal with clients," says Janet Davies, managing director of Symponia. Advisers should try to take steps during their fact find to assess the client's mental well being and if the client appears to be confused at any point then the adviser's concerns should be logged. It doesn't have to be obvious and seem patronising, but inserting some questions requiring sequential answers at random into the conversation will help prove (or otherwise) mental capacity. If the adviser has any concerns they should get legal advice as people can sign things without understanding what they've done."

Of course the adviser cannot compel the client to seek legal advice but they can play an important role in making sure clients are aware of the options available to them.

"The only thing the adviser can do is keep asking the client if they have set up power of attorney," says Shindler. "They need to make the client aware that their affairs can quickly become a real mess unless there's someone with legal authority to deal with them in their place."

The best way forward it would seem is for the adviser to adopt a holistic approach to the situation. By working together with the person's family and solicitor then the process can be handled in a smooth manner.

"The financial adviser and solicitor need to get the person's family involved as much as possible as early as possible," says Neil Marsh, managing director at Hornbuckle Mitchell. "This enables the designated people to gain a full understanding of the person's investments and how they interrelate with each other which makes things easier. It is also essential that the adviser works closely with the solicitor who is drawing up power of attorney. It's a real belt and braces approach."

- For more information please visit The Public Guardianship Office at www.guardianship.gov.uk.

Helen Morrissey
Editor - Retirement Planner
Incisive Media