Remove the rotor arm (that is what the nice policeman suggested!). and make sure all neighbours, friends and her local garage know that the car "cannot be fixed"
Aunt had to present her licence to the police after being reported for leaving the scene of an accident (thankfully a minor bump when reversing). They agreed not to prosecute if she returned her licence to Swansea though I am not sure she understood. However we dutifully did the deed on her behalf. Just beware the DVLA getting in touch with her some months down the line to ask if she would like to re-apply!!! and I'm not joking
I can totally relate to this one too. My mum was well into the middle stages of alzheimers and insisted her driving was perfect. Even loosing her car on many occasions didn't deter her. I notified the DVLA when diagnosed and she went for an assessment to the mental care section of social services - all the questions asked would never flush out a dementia patient!! I was at the interview and didn't want to "run down" my mother's driving in front of her, however when the consultant asked my opinion of what I thought of her driving I replied "that I wouldn't sit beside her" hoping that would get the point across in as few words as possible!! Well the letter arrived from DVLA and I hoped it was to tell her she couldn't drive - it told her she could drive for another year!!!
We sufferred it for another six months our hearts in our mouths and eventually I decided to take my mother away on holiday for a few months and the car disappeared while she was away. (my brother sold it - we have power of attorney in place) I told her while we were away that the car would be gone when she got home and she was really upset for a while but when we returned home she accepted it quite gracefully. A year later she occasionally mentions that she is mad that she can't drive and declares that she is still an excellent driver (can't find her way to the toilet anymore!!)
It was a solution that worked for us (the length of vacation I don't think is relevant) I took her to visit her granddaughter abroad before she would forget who she was.
I think we need to keep uppermost in our minds the safety of other people on the road rather than hurting feelings that will most definitely be hurt no matter what time we decide that it is time for our loved one to give up the car keys!!