My sister, who is 64 years old and due to retire in 2 years’ time, has been diagnosed with early signs of dementia.  She is understandably nervous about the future as she knows she is going to need care for many years as her condition worsens.  She is physically perfectly well so we’re expecting her to be retired for a long period.  She has a private pension that is worth around £425,000.  We understand that it is normal these days to go into a drawdown contract when you retire but she is concerned that she won’t be able to deal with the work involved on an ongoing basis.  Can she still just buy a pension contract that gives her an income for life?

Carl Lamb Executive Director at Smith & Pinching responds

There are two main ways to use your pension savings to fund your retirement income needs.  Flexible drawdown has become the most popular option:  this involves taking withdrawals direct from your fund as needed, leaving the remainder invested.  It has the advantage of allowing you to take only what you need as you need it but does bear the risk of market falls and of the fund being depleted over time.  It would also mean that your sister (or her representative) would need to review her investment strategy on a regular basis to ensure it continues to meet her needs.

The alternative to drawdown is to buy an annuity – a guaranteed income for life.  This has become less popular in recent years as it entails spending the fund at the outset to buy an income plan, but it can be suitable in some cases, including where the person involved is vulnerable.  This is certainly an option for your sister if she wants to have the reassurance of a secure income after losing capacity.

In fact, it is possible to combine both approaches, either simultaneously or over time, to give both flexibility and security – but the suitability of that will depend on all your sister’s financial circumstances and her needs.  For example, she might rely on drawdown in the early years but if she needs care in the future, she might perhaps then purchase a special Care Fees Annuity which provides a top-up to income for life to meet the cost of care fees.

Independent financial advisers look at all the options and have procedures in place to ensure that vulnerable clients like your sister are given the protection they need – which in your case might mean having you attend meetings with her to understand her options.  An adviser can use cashflow modelling tools to show your sister how her pension can accommodate her needs in both the short and the long term and allow her to plan her spending and lifestyle accordingly.

It is, of course, critical that your sister sets up a Lasting Power of Attorney so that if and when she does lose the capacity to manage her own affairs, she will have someone she trusts to look after her pension in her place.

Any opinions expressed in this article do not constitute advice.  The value of an investment and the income from it could go down as well as up.  The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.