Older couples could see their household incomes drop by two-thirds if one partner dies under new state pension rules

28 June 2019
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Changes made to the state pension system in 2016 could mean that older couples face an unexpected financial shock when one partner dies, insurer Royal London warns.

In some cases, pensioners could see their total household income fall by up to two-thirds if their partner dies, resulting in a squeeze on living standards, Royal London says.

Under the old state pension, when one member of a married couple died their surviving spouse was entitled to make a claim to an enhanced state pension based on the late spouse’s National Insurance record. 

However, since the introduction of the new state pension in 2016, the right to claim a state pension based on a spouse’s National Insurance record has been largely abolished. 

While many women will get a higher pension at retirement with the new state pension, there is now "very limited scope" for inheritance, the insurer says.

Steve Webb, director of policy at Royal London, says: “As well as the emotional impact of bereavement, losing a spouse in later life can have a huge impact on living standards. Under the new state pension system, widows and widowers will inherit little, if anything of their late spouse’s pension and income from an annuity often ceases when the recipient dies.

“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.”

Impact of bereavement on income

The impact of bereavement on a couple’s finances will depend on their sources of income.

Whereas there is effectively no inheritance of the new state pension, those receiving occupational pensions will often leave half to a surviving spouse. 

On the other hand, those in receipt of a standard ‘single life annuity’ will often pass on none of this to a surviving spouse. 

Case 1: Couple, both on full flat rate pension, no other income

Income before bereavement: Full state pension of £168.60 per week x 2

Income after bereavement: Full state pension of £168.60 per week

Change in income after bereavement: -50%

Case 2: Couple, both on full flat rate pension, one company pension of £160 per week - assume half inherited on bereavement

Income before bereavement: Full state pension of £168.60 per week x 2 plus £160 per week company pension

Income after bereavement: Full state pension of £168.60 per week plus £80 per week company pension

Change in income after bereavement: -50%

Case 3: Couple, both on full flat rate pension, one single-life annuity of £160 per week 

Income before bereavement: Full state pension of £168.60 per week x 2 plus £160 per week annuity

Income after bereavement: Full state pension of £168.60 per week

Change in income after bereavement: -66%.

The loss of income on bereavement will be substantial in all of these cases, but will be particularly acute if one partner has bought a ‘single life’ annuity (the most common type of annuity) which has no provision for a spouse beyond a minimum guarantee period.

Impact of bereavement on spending

As a result of there only being one person in the household, the fall in outgoings is likely to be much smaller than the fall in income.

Although a widow/widower may have lower outgoings than a couple, major spending areas will fall by as much as the fall in income, meaning household finances are likely to be under greater pressure.

The following table shows what might happen to major spending areas following a bereavement:

Spending areaReduction in cost following bereavement
Rent / mortgageNo change in short term; possible reduction eventually if possible to 'downsize'
Council taxStandard 25% reduction for 'single person discount'; possible additional help if on low income
Energy billsModest reduction, but heating costs etc likely to be similar
WaterSome reduction if metered, but unlikely to halve
FoodSome reduction, but can be expensive to shop for one person
CarNo change in fixed costs (eg tax, MOT, repairs)

What can you do about this?

Find out where you stand – check how much of any occupational or private pension income would be passed on when one partner dies. If you are unsure about your rights from the state pension, the government website goes through the options: 

Be careful with your finances earlier in retirement – if it is possible to build up a savings buffer earlier in retirement this will help the surviving widow/widower to cope with the financial shock of bereavement.

Consider a financial product that would pay out if one partner were to die –various products such as life assurance / term assurance might be worth considering for peace of mind if one partner were to die.

Comments

Poor Souls

Couples on the new state pension living together do very well and with an extra £160 should be well off. What about a single pensioner on old state pension that has own house and some savings through being thrifty getting about £130 a week, still have same costs as a couple as listed in your items also they have to insure, service boiler, do repairs and if storm damage or such claim have to pay excess, TV licence costs same for one as for a house full so the single ones ae the ones suffering. Maybe single pensions without additional income should get a single occupancy supplement rather than a couple getting double.

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