In today’s ever-changing financial landscape, equity release and lasting power of attorney have become increasingly important topics for many UK homeowners.

When considering the criteria for equity release, and as life expectancy continues to rise, it is more important than ever to make sure you have a plan in place should you become incapable of looking after your own affairs. 

In this article, the EveryInvestor team delves into how equity release can offer financial flexibility in retirement and discuss the importance of a lasting power of attorney in safeguarding your financial future. 

A look at the role that equity release and lasting power of attorney can play in achieving financial security and peace of mind…

What Constitutes Equity Release in the UK?

Equity release, designed for homeowners aged 55+, offers a method to access your home’s equity without selling it, including the option to release equity through a mortgage.

This financial strategy is especially useful for those seeking extra funds for unexpected life events or to maintain a comfortable lifestyle in retirement.

The main forms of equity release are lifetime mortgages and home reversion plans.

In a lifetime mortgage, the loan amount, along with accumulated interest, is repaid once the house is sold, typically after the homeowner’s passing.

Home reversion plans differ by allowing you to sell a part of your property in exchange for a lump sum or regular payments, whilst continuing living there.

What Is a Lasting Power of Attorney?

A Lasting Power of Attorney (LPA)¹ is a legal document that gives you the option to designate a trustworthy person (referred to as an “attorney”) to make decisions for you if you become unable to do so. 

There are two types of LPA that cover different aspects of your life. The first deals specifically with property and financial affairs, whilst the second is intended for health and welfare matters. 

What Is the Relationship Between Equity Release and Lasting Power of Attorney in the UK?

Equity release and lasting power of attorney (LPA) in the UK are interconnected when it comes to managing financial matters in later life.

Equity release allows you to access the wealth tied up in your property, whilst a LPA grants a chosen individual the authority to make decisions on your behalf.

If you are unable to manage your affairs, your LPA representative can handle the equity release process, ensuring your financial resources are effectively managed.

However, it is crucial to note that LPAs do not automatically include authority over equity release dealings.

Specific permissions must be outlined in the LPA document.

Therefore, it is essential to discuss these matters with your legal adviser when setting up your LPA.

This ensures that your representative can manage all financial affairs, including equity release, if required.

This integrated approach provides peace of mind and a comprehensive plan for your future.

Should I Consider a Lasting Power of Attorney With Equity Release?

You should consider a Lasting Power of Attorney (LPA) with equity release so that you will have someone (an ‘attorney’) you trust who will be able to act on your behalf if you become mentally incapacitated, especially if you have a drawdown lifetime mortgage.

Equity release allows homeowners to unlock the value tied up in their property, providing them with a tax-free lump sum or smaller installments without the need to move, but it also comes with the risk of leaving less inheritance for beneficiaries.

However, it is essential to plan for the future and consider the possibility of losing mental capacity or facing health challenges.

Why?

It is a common belief among many individuals that their partner or spouse will have the automatic authority to make decisions on their behalf in the event of their incapacitation.

Unfortunately, this is not true, unless there is a LPA in place granting your partner or spouse the authority to act for you.

Having a LPA in place alongside your equity release plan ensures that your chosen attorney(s) can manage the equity release product on your behalf if you are unable to make decisions. 

By doing this, you can rest easy knowing that your financial matters will be handled in the way you wish them to be.

Am I eligible?

The only requirements are that you are over 18 and have the mental capacity to sign an LPA.

Remember…

It is important to consult with a solicitor to set up a LPA and seek advice from a qualified financial advisor specialising in equity release to ensure you are fully informed about the implications and potential risks involved.

Some of the risks of equity release include the impact on the inheritance you leave to your heirs and the potential impact on your means-tested benefits.  

By combining equity release with a lasting power of attorney, you can take a well-rounded approach to managing your finances and safeguarding your future.

Why Should I Combine Equity Release With a Lasting Power of Attorney?

You should combine equity release with a Lasting Power of Attorney (LPA) as a precaution against any future situation where you may be unable to make decisions about your equity release on your own.

With a LPA, your attorney will interact with your lender as if they were you, and will sign any documentation or undertakings on your behalf.

Some lenders offer their clients the opportunity to set up a LPA if they have taken out an equity release loan.²

Some reasons to consider taking out a LPA include…

• Ageing and illness: As you age or face health challenges, the risk of losing mental capacity increases. Dementia, stroke, or severe accidents can all lead to a loss of capacity, making it essential to have a LPA in place beforehand to ensure your affairs are managed according to your wishes.
• Peace of mind: By setting up a LPA, you can find comfort in knowing that a person you trust will take decisions on your behalf if you are unable to make them yourself. This can give you, your family, and friends peace of mind knowing that your interests and wishes will be respected.
• Financial planning: Establishing a LPA can be an essential part of your financial planning, particularly if you have complex financial affairs or significant assets, such as property or investments.
• Healthcare decisions: You can appoint someone you trust to make healthcare decisions for you in the event that you are unable to make them on your own. This means your preferences will be followed, even if you cannot express them at the time. This can include decisions about your medical treatment, care, and living arrangements.

What Type of Lasting Power of Attorney Should I Consider?

The type of Lasting Power of Attorney you should consider depends on your circumstances and what you intend the LPA to be used for.

In the UK, there are two main types of Lasting Power of Attorney (LPA) available, each designed to cover specific aspects of a person’s affairs. 

The two types of LPA are…

• Property and Financial Affairs LPA
• Health and Welfare LPA

A look at these two options in more detail…

Property and Financial Affairs LPA 

A Property and Financial Affairs LPA allows you to appoint one or more attorneys to make decisions regarding your property and financial matters.³ 

Attorneys can manage your bank accounts, pay bills, collect your pension or benefits, sell or rent your property, and handle your investments on your behalf. 

It is worth noting that you can decide if you want your attorney to act for you when you are still able to make decisions or only if you become unable to do so in the future.

Health and Welfare LPA

A Health and Welfare LPA is focused on your personal welfare and healthcare decisions.⁴ 

Your appointed attorney(s) can make decisions about your medical care, daily routine (such as eating, dressing, or washing), living arrangements, and even life-sustaining treatment. 

This specific LPA only becomes effective if you become incapable of making decisions on your own due to an illness or disability.

What else do I need to know?

It is possible to have both types of LPA in place, and you can appoint the same or different attorneys for each LPA. 

Apart from LPAs, there is another type of power of attorney called Ordinary Power of Attorney (OPA), which is not as commonly used.

Ordinary Power of Attorney (OPA)

An Ordinary Power of Attorney (OPA) is a temporary arrangement granting someone the authority to handle your financial affairs for a limited period or specific purpose, such as when you are on an extended holiday or temporarily unable to manage your affairs. 

Unlike LPAs, OPAs are not applicable if you lose mental capacity.

Important…

Before setting up a LPA, it is crucial to seek legal advice and carefully consider who you want to appoint as your attorney(s). 

Once a LPA is registered with the Office of the Public Guardian, it becomes a legally binding document, providing your chosen attorney(s) with the authority to act on your behalf as specified in the LPA.

What about an Enduring Power of Attorney?

The Enduring Power of Attorney (EPA) was replaced by the LPA in 2007.⁵  However, if you had already signed an EPA before this date, it is still considered legally valid.

An EPA incorporates the functions of both a Property and Financial Affairs LPA and an Ordinary Power of Attorney, protecting you in the event of a loss of mental capacity and giving you the right to appoint someone to act on your behalf temporarily.⁶

When Should I Take Out an LPA?

When you should take out an LPA is entirely up to you, but given the unpredictability of life, it may be best to have one in place sooner rather than later.

It is wise to consider setting up a Lasting Power of Attorney (LPA) when you are in good health and have full mental capacity. 

Although it may seem premature, planning ahead ensures that you have control over your choice of attorney(s) and the authority you grant them, whilst also protecting your interests in case of unexpected events.

Is it really that important? 

The best time to take out a LPA is when you are healthy and capable of making informed decisions. 

Once you lose mental capacity, it becomes impossible to set up a LPA, and your loved ones may have to apply for a deputyship⁷ through the Court of Protection, which can be a lengthy and costly process. 

By planning ahead and setting up a LPA, you can ensure your affairs are handled by someone you trust and avoid putting additional stress on your family in the future.

Why Is a Lasting Power of Attorney Particularly Important if You Have a Drawdown Lifetime Mortgage?

A Lasting Power of Attorney is particularly important if you have a drawdown lifetime mortgage for several reasons.

These include…

• Managing your mortgage: A drawdown lifetime mortgage allows you to release a portion of your property’s equity as a tax-free lump sum or in smaller amounts over time. If you lose mental capacity or face health challenges that make it difficult to manage your finances, having a LPA in place ensures that your attorney(s) can access the remaining funds, make decisions on when to draw down further funds, and manage any mortgage-related matters on your behalf.
• Safeguarding your interests: In case you lose capacity and do not have a LPA, your family may need to request a deputyship through the Court of Protection. This process can be time-consuming, expensive, and may result in a court-appointed deputy who may not be familiar with your wishes and preferences. With a LPA, you can appoint a trusted individual to make decisions that align with your best interests and financial goals.
• Adapting to changing needs: As you age, your financial needs and circumstances may change. A LPA allows your attorney(s) to make necessary adjustments to your drawdown lifetime mortgage plan, ensuring that it continues to meet your needs and remains in line with your financial objectives.
• Meeting provider requirements: Some equity release providers require that a LPA be in place before approving a drawdown lifetime mortgage, to ensure that someone can make decisions and manage the mortgage if you become unable to do so.

Having a LPA when you have a drawdown lifetime mortgage is crucial for protecting your interests and ensuring your financial affairs are managed according to your wishes. 

A LPA allows your attorney(s) to make informed decisions about your mortgage and adapt to your changing needs, providing peace of mind for you and your family.

Making Further Drawdowns With a LPA in Place

If you have a drawdown lifetime mortgage and a lasting power of attorney (LPA) in place, and you need to make a further drawdown, the process depends on your mental capacity and the terms of your LPA.

If You Have Mental Capacity

If you have the mental capacity, you can request the drawdown yourself by contacting your equity release provider, following their specific process, and providing the required documentation.

If You Have Lost Mental Capacity

If you have lost mental capacity, your attorney(s) appointed under your Property and Financial Affairs LPA can handle the drawdown on your behalf. 

Your attorney will need to follow this process…

1. Inform the equity release provider about their appointment as your attorney and provide a copy of the registered LPA document, which proves their authority to act on your behalf.
2. Request the drawdown, following the equity release provider’s process, which may include filling out forms or providing additional documentation.
3. Ensure that the drawdown aligns with your best interests and the terms specified in the LPA.

Remember that the attorney(s) must always act in your best interests and follow any guidance or restrictions outlined in the LPA. 

It is crucial to appoint a trusted individual who understands your financial situation and goals when setting up an LPA.

By having both a drawdown lifetime mortgage and an LPA in place, you ensure that your financial matters can be managed efficiently and in line with your wishes, even if you lose the capacity to make decisions yourself.

Making Further Drawdowns Without a LPA in Place

If you have a drawdown lifetime mortgage but no Lasting Power of Attorney (LPA) and you need to make a further drawdown, the process will depend on your mental capacity.

If You Have Mental Capacity

If you have mental capacity, you will, of course, be able to request the drawdown yourself by contacting your equity release provider.

If You Have Lost Mental Capacity

If you have lost mental capacity and you do not have a LPA in place, your family or loved ones will face a more complicated and time-consuming process. 

How so?

They will need to obtain a deputyship order from the Court of Protection.

A deputy is an individual chosen by the court to oversee the management of the property, financial affairs, or personal welfare of someone who is not capable of doing it themselves due to a lack of mental capacity.

Applying for deputyship can be a time-consuming, expensive, and emotionally taxing process for your loved ones.

Once appointed, the deputy will have the authority to manage your finances, including making further drawdowns from your lifetime mortgage. 

However, they will need to follow the court’s guidance and act in your best interests.

Another way…

To avoid this scenario, it is highly recommended that you set up a LPA while you have full mental capacity. 

This ensures that someone you trust can manage your financial affairs, including further drawdowns from your lifetime mortgage, if you become unable to make decisions yourself. 

Setting up a LPA can save your loved ones from a difficult and time-consuming deputyship application process and provide peace of mind for all involved.

Equity Release and Lasting Power of Attorney Case Study

An equity release and Lasting Power of Attorney case study will help us illustrate how useful this document can be.

You and your spouse still have £40,000 available in your joint drawdown mortgage.

Imagine you become mentally incapacitated and cannot co-sign to draw down the money.

If there is a LPA in place, it is a relatively simple process, because the person who has Lasting Power of Attorney over your affairs can act on your behalf.

On the other hand…

If you do not have a LPA, the Court of Protection will need to appoint a deputy⁸ for you.

This is for illustration purposes only. 

Common Questions

In Conclusion

Growing old and losing your ability to look after yourself is not something many people enjoy thinking about, but it is an eventuality you will need to prepare for.

Equity release and lasting power of attorney are essential tools for UK homeowners seeking financial flexibility and peace of mind during their later years. 

By understanding the intricacies of these financial instruments, individuals can make informed decisions about their future and safeguard their interests. 

It is crucial to seek professional advice from qualified equity release brokers and advisors when considering equity release and setting up a Lasting Power of Attorney. 

With the right guidance and planning, equity release and a lasting power of attorney can help secure a comfortable and financially stable future for you and your loved ones.