Given that more than two years have passed since the introduction of “pension flexibility”, it is worthwhile having a reminder of the potential legal difficulties that may arise from choosing a drawdown scheme instead of an annuity.
An annuity requires a one-off decision to be made, after which the regular income is paid for life without any further input being needed. Drawdown, on the other hand, requires a decision to be made each and every year before any income is paid from the pension fund.
Whilst drawdown therefore has the benefit of flexibility – that is, tailoring the income received to changing needs – this does come with a couple of disadvantages.
First, if you experience ill-health during retirement, you may not be able to manage your financial affairs. This in turn could result in you being unable to make the annual decision regarding a drawdown from your pension, and be unable to take any benefit from your pension without a time-consuming and expensive Court Order.
Second, if you were ever to need care – whether in your own home or in a care home – then the Local Authority will expect you to fund that care from your income before looking at your capital (if this exceeds the current upper financial threshold of £23,250). If you choose not to take any income from your drawdown pension, or are unable to do so due to incapacity, then the Local Authority has the power to assess you financially as though you were in receipt of an annuity.
That is not to say, of course, that an annuity is preferable to drawdown. It is rather a case of taking the right advice – both financial and legal – before committing to one option or the other, and ensuring that you have the right legal documentation in place.
For example, you could put in place Lasting Powers of Attorney (LPAs) in which you choose an Attorney or Attorneys to make decisions on your behalf – financial but also medical/care decisions – if ever you were unable to do so for yourself. You could also have appropriately drafted Wills to help protect a significant proportion of your assets from the potential liability of care home fees.
For further information and advice, please contact Matthew Porter on 01733 888986 or Matthew.Porter@buckles-law.co.uk.
