A little-known pension quirk risks leaving millions of older people on incomes 50pc or even two thirds lower when their spouse dies.
A surviving husband or wife will no longer inherit their partner’s state pension when they pass away, under rules changed in 2016. Coupled with an average entitlement of just half of their loved one’s private pension, the impact on the household income can be dramatic.
Women, who live on average three years longer than men, according to the Office for National Statistics, are most likely to be left on a greatly reduced income. Their outgoings would fall by much less.
Analysis by Royal London, a pension company, found that in the worst cases, the surviving spouse has two thirds less money. Sir Steve Webb, a former pension minister and now at the company said: “As well as the emotional impact of bereavement, losing a spouse in later life can have a huge impact on living standards.”
Households that rely on annuity income are likely to be worst off. Workplace pensions often pay half of the member’s income to a surviving spouse. Those in receipt of a standard “single-life annuity”, however, are usually unable to pass any of it on.
Where both spouses received the full flat-rate pension of £168.60 a week plus £160 a week from the deceased partner’s single-life annuity, the bereaved spouse keeps only their own state pension, a 66pc financial loss.
For a couple both on the full state pension and where one is also in a work scheme paying £160 a week, the surviving spouse’s income halves as they lose their partner’s state benefit plus half of their private pension.
Couples who rely totally on their state pensions are left with just £168.60 a week when one dies.
Sir Steve said: “Household outgoings may reduce somewhat following a bereavement, but income is likely to fall by much more. Couples in retirement need to make sure they know where they would stand and plan ahead to make sure they do not face an unexpected financial shock.”
To prepare for a financial squeeze after the loss of a loved one, both partners should check their entitlement to any occupational or private pensions if one partner were to die and consider saving into pensions that will payout to surviving partners.
A savings buffer built up earlier in retirement can also help the surviving widow or widower to cope with the financial shock of bereavement.
Article by Laura Miller- Telegraph