Dementia: Heartbreaking, sad… and also a major financial problem

It is important that this column is read by both parents and their children. The problems of dementia, including Alzheimer’s disease, are:

• Costs: The treatment of serious illnesses, including dementia, can be long and drawn out, costing a lot of money. Frail care can cost up to R40,000 a month, in addition to the cost of medicine, nappies and medical aid contributions. Frail care and home care are only covered on the top medical aid options, and there are rand limits.


• Scams: Pensioners are subject to more scams than any other group, particularly when they are of failing mind.


• General rips-offs: There is often a problem being a pensioner – people talk down to you. It doesn’t matter who you are. They will not explain things properly or will try to pass off a higher-priced item on to you. Medical aid schemes are also notorious for trying to reject claims of the elderly. The government has passed legislation to protect the elderly, but there does not seem to be much in the way of compliance. It is not a problem just here, but around the world. You can see what has happened in old-age centres where people have been left unattended with Covid-19, and where there have been very high rates of infection or death.

The scams

Scams where pensioners are taken to the cleaners come from a variety of sources and for different reasons.

• Pensioners are often desperate for better returns. Consider that the average replacement ratio of a pension is only about 20%, according to research done by the country’s biggest retirement fund administrator, Alexander Forbes. A replacement ratio is the percentage by which your retirement income will replace your final salary.


• Serious illnesses, with dementia being the top of the list, makes people even more vulnerable. The scamsters come from almost anywhere. They include:
  
  
  
  • Product providers. The biggest scam, pulled mainly on pensioners, was property syndications, sold during the 90s and the early parts of this millennium. Billions of rands were in effect stolen from pensioners under the guise that these were low-risk investments. There are many other scams. The list goes on forever with investment in fictitious goldmines, with names like Eldorado, to currency trading, to pyramid Ponzi schemes.
  
  
  • Some financial advisers who have sold purely on maximum commission, such as property syndications.
  
  
  • Scams from other professionals, such as some lawyers or accountants, come in various forms, from passing accounts of major sleaze companies through to allowing over-charging and general malpractice.
  
  
  • It is amazing how relatives, even close relatives, will move on someone who they think is vulnerable, particularly if the relative is short of cash.
  
  
  • Over the years there have always been cases where caregivers manage to get wills altered by various, often devious means.
  
  
  
  

(This does not mean all are involved. Most people are very honest and treat pensioners well. The trouble is you always have the hard men everywhere, from gangsters to con artists)

The Catch-22 of dementia

Your financial well-being in retirement depends on your being able to make decisions, to contract and to litigate, either independently or with the assistance of others. So, what happens when you no longer have this ability? The answer: You become a danger to yourself.

The law requires that you must be able to understand the nature, purpose and consequences of your actions. If you are not able to understand what you are doing, then any contractual decision is invalid in law.

But it is not quite so simple. There are still several problems:

• First Catch-22: The onus is on the person, claiming diminished mental capacity, to prove that a transaction is invalid. The problem is that if you are of unsound mind, you are unlikely to know about your condition or that you have made a poor decision.

If a court has declared you to be of unsound mind and incapable of managing your affairs, then the onus to prove you were of sound mind shifts to the party that wants to hold you to a legal transaction.

• Second Catch-22: Dementia is the loss of cognitive functioning – namely, thinking, remembering and reasoning – and behavioural abilities, to the extent that it interferes with your daily life. Dementia does not occur overnight – it is a gradual process that can take place over many years, often with periods of total lucidity on the downhill slope, until the sufferer cannot carry out simple functions. This makes it difficult to take timely action.

You and your family cannot come to a decision that at a particular age or stage you will sign a “power of attorney” that gives nominated people the right to handle your affairs and control your finances, from banking and investments to paying your daily living expenses. This is because a power of attorney is only valid for as long as you can manage your affairs. As soon as you are no longer capable, the power of attorney lapses. In other countries, there are what are called “enduring powers of attorney”, but this isn’t the case in South Africa.

Dementia:

Legal procedures: There are two procedures, but both have significant limitations:

• One is to apply to the high court for a curator bonus, where the curator will control your affairs. However, the curator does not have unfettered power. The curator cannot sign a will or become embroiled in a divorce action.


• The other is to apply to the Master of the High Court in terms of the Mental Health Act. This, however, is limited to people whose assets are worth less than R200,000 or have an income of under R24,000 a year. Again, there are limitations. For example, you can still enter into a contract and if the other party can prove you were lucid at the time, the contract stands.

If you fear that you are susceptible to dementia, you should plan your financial affairs in advance, these are things you should consider:

• Purchase a guaranteed annuity or hybrid from a life assurance company. This is the easiest and cheapest way to protect your capital. With a guaranteed annuity:

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  • Your capital will be safe. With a living annuity, someone could increase your drawdown and then steal the increased income flow. This will advance your “point of ruin” when you reach the maximum drawdown of 17.5% of your capital and then the rand income will decrease.
  
  
  • You can provide for a spouse’s income that will be payable once you pass away for the rest of your spouse’s life, thereby securing her income needs.
  
  
  • With a hybrid, provided you have enough capital, you could ensure that the life annuity portion provides sufficient monthly income to cover the costs of the frail care and any other essential expenses.
  
  
  • It is likely that your life expectancy will be shortened through dementia and the underwriting will provide you with an enhanced income over your remaining lifetime.
  
  
  
  

• Establish a trust: The trustees will then administer the assets in the trust. Challenges include:

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  • This can be an expensive and complicated option, particularly from a tax perspective.
  
  
  • The trust should be structured so that it will receive an income or have the right to an asset, such as a house, until you die. You need to be very careful of your trustees.
  
  
  
  

• Many families devise their own informal arrangement. Try to involve a financial planner who has experience in such matters. There is a comparatively new financial advice organisation called that South African Independent Financial Advisors Association which has focused much of its attention on retirees, introducing a Certified Post Retirement Practitioner course to members, which covers everything from income in retirement through to the cost of frail care to dementia. BM/DM

Bruce Cameron, the semi-retired founding editor of Personal Finance of Independent Newspapers, over a number of weeks will look at the state of pensioners and retirement funds, which will highlight research undertaken by Alexander Forbes on retirement income in South Africa. Cameron and Wouter Fourie are co-authors of the best-selling book, The Ultimate Guide to Retirement in South Africa.