Savers risk leaving their spouse short at retirement
An increasing number of couples are not making any provision for pension payments to continue to the surviving partner in the event of their death, according to new research by Aegon.
While 75% of over 75s have made pension provisions for a spouse, this number falls to 47% among those aged 45-54.
If an individual dies in retirement and has made no provision, whether they are in a final salary (defined benefit) or defined contribution (DC) scheme, their pension stops and does not continue to their surviving spouse.
Most final salary schemes do include provision for a surviving spouse - but these schemes are in rapid decline. Defined contribution pensions, on the other hand, can be passed onto any named beneficiary, including children.
Retirement shortfall risk
Thanks to new rules brought in two years ago heirs now just pay income tax at their marginal rate when the money is withdrawn.
In the case of the state pension, those that reached state pension age before 6 April this year can pass on the part of their payments to a surviving spouse.
The new state pension (which came into effect from 6 April), however, does not continue to a surviving spouse so once fully rolled out, there will be no survivor pension.
But if an individual would have been entitled to more than the new state pension under the old system, they will receive that higher amount and the extra is called the protected pension. On their death, their surviving partner can inherit half of this extra part.
While automatic enrolment will over time mean more individuals have a pension, 25% of respondents in this survey said their spouse had no pension of their own, raising the question of how their partners would get by financially if the worst happened.
These findings highlight the risk of a shortfall in retirement income for the bereaved, which is likely to grow in the years ahead as final salary schemes become less commonplace, if couples don't plan their retirement finances together.
Kate Smith, head of pensions at Aegon, says: “Historically, company defined benefit and state pension payments would continue to a partner on the death of the individual.
“However, with the shift away from defined benefit and with changes to state pensions meaning a partner will no longer receive a survivor pension, these findings suggesting younger and future generations of retirees are less likely to provide for their spouse are worrying.
“The current generation of defined contribution savers have to plan their pensions together more than previous generations.
“In some cases, each partner will be building up their own pension and this trend is likely to increase as automatic enrolment brings millions more into workplace pensions.
“However, for some, their workplace pension will be very modest - and self-employed or non-working spouses won't benefit in this way.”
Aegon suggests three things to consider:
If you want to buy an annuity, think about buying a joint life annuity so that payments continue in the event of you dying.
Income drawdown from an invested pension fund might provide you with a more flexible option. In drawdown, partners can inherit unused funds.
If you have a defined benefits pension scheme, check you have a spouse's pension.
This story was originally written for our sister magazine, Money Observer.
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.