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What would happen if you could no longer make decisions about your own finances? The case of Kate Garraway’s husband still hangs prominently in public consciousness. After he contracted COVID-19 in March 2020, Derek Draper became seriously ill and suffered severe internal organ damage. He was placed into a medically-induced coma to save his life.
During this time, his wife was unable to access his bank accounts and was forced, eventually, to ask friends for financial support. This is because Derek had no power of attorney (POA) in place to allow his wife to make decisions on his behalf. Below, we explain why POA is so key for so many UK households – not just the elderly – and how to integrate it into a financial plan.
What is power of attorney?
Power of attorney (POA) is a legal document allowing you to appoint one person – or multiple people – to make certain decisions on your behalf if you are no longer willing, or able, to do so yourself. This can be useful, for instance, to help address a scenario where you no longer have “mental capacity” to make or communicate specific decisions (at an appropriate time, and with sufficient judgement).
This can get very complicated, of course. After all, perhaps you could find yourself in a situation where you can make certain decisions (e.g. what to wear that day) but not more complex ones, such as those about estate planning. Moreover, getting diagnosed with a brain-influencing condition like dementia does not automatically mean you no longer retain mental capacity. It might just mean (for now) that it takes longer to make complicated decisions.
As such, power of attorney (POA) is not necessarily a simple matter of setting up a policy and then forgetting about it. You will need to review it as you update your financial plan throughout your life. The Derek Draper case also shows how mental incapacitation can happen to anyone. This is not just a matter for the elderly. Those with dependents and young children should take note, especially, as POA could help prevent landing your loved ones in financial difficulty.
Types of power of attorney
Power of attorney comes into three broad types: ordinary power of attorney (OPA), lasting power of attorney (LPA) and enduring power of attorney (EPA). Here is an overview of the main differences between them:
- OPA. Also sometimes called general power of attorney, this remains valid until you lose mental capacity. It is useful if you need to temporarily hand certain decisions to someone else (e.g. due to a protracted season of illness, or time travelling overseas).
- LPA. Comes into effect when you lose mental capacity or if you decide to formally hand over decisions about your affairs (e.g. about your health/social care).
- EPA. These were phased out in October 2007 and replaced by LPAs. However, certain policies still remain valid and operate similarly to LPAs.
Different subtypes of POA exist within these categories. In particular, lasting power of attorney (LPA) comes in two primary forms: LPA for financial decisions and LPA for health and care decisions. The former delegates decisions to trusted people about things such as paying bills, managing mortgage payments and investing your money. The latter hands over decisions on where you should live, who you can meet and other lifestyle decisions.
Do I need power of attorney?
Generally speaking, if you have built up a degree of wealth and you have financial dependents – such as children – then it is wise to consider setting up power of attorney. The time may come when they need to access your assets to maintain their lifestyle, and you cannot take necessary steps yourself to allow this.
POA can be looked at as part of your estate plan (e.g. when drawing up a will) and financial protection plan, since very similar issues and questions tend to arise during these discussions. For instance, inheritance tax (IHT) planning concerns what happens to your wealth when you die, but what about if you become seriously ill or injured – no longer able to work and produce income to support your family? Your circumstances and priorities may also change as you go through life, children leave home or other unexpected events happen (e.g. divorce).
One key question to reflect on is how long you may need POA, and might you need multiple policies to cover different needs? For example, if you are travelling abroad for a few years and need someone to manage decisions about your property and other UK assets in the meantime, you may need an OPA policy on top of LPA policy (where the latter covers your possible mental incapacitation). If you have children and they eventually leave home, might you need to update your POA policies now that they are more (or completely!) financially independent?
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
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