The new pension freedoms introduced in April 2015 have given retirees the option to keep investing their pension pot and draw an income directly from it, as well as the option to pass their pension pot on to their beneficiaries when they die.

While this greater flexibility is very attractive to some retirees, there is one obvious risk.

What will happen if their health deteriorates and they are no longer able to manage their income drawdown arrangement?

What if they need to adjust their income level (for example, to pay for care costs) or adjust their underlying investment choices? Who will make these decisions and instruct the pension company?

Obtaining authority to act on an individual’s behalf can be complicated, time-consuming, expensive and require a court intervention – even for a spouse or close relative.

Of course this risk isn’t new, but it is accentuated by the new rules and the fact that more and more people are likely to opt for income drawdown and keep their pension pots invested until the day they die.

In the ‘old days’, the vast majority of people retiring took out an annuity, whose terms (and income) are fixed for life and, therefore, incapacity was not such a risk as there are no decisions to be made.

Fortunately, a Lasting Power of Attorney (LPA) is a simple but highly effective solution. This legal document provides for one or more people to make decisions on an individual’s behalf if they are unable to manage their own affairs.

An LPA should arguably be an essential part of the financial planning process for any person opting for income drawdown when they retire. Currently, there seems to be limited usage of LPAs alongside income drawdown arrangements, which could be a recipe for problems in the future for those without an LPA.

Putting an LPA in place is a sensible step for anyone considering an income drawdown arrangement.