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Pension shock warning for older couples

Written by: Emma Lunn
Pensions experts have warned that new state pension rules could lead to financial shocks in retirement.

Little noticed changes to the state pension system which took place in 2016 mean older couples could face an unexpected financial penalty when one of them dies, according to analysis from insurer Royal London.

A typical pensioner could see their total household income fall by between half and two-thirds following bereavement, whilst their outgoings would fall by much less, resulting in a squeeze on living standards for the newly bereaved person.

Steve Webb, director of policy at Royal London, said: “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.”

Prior to 2016, 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.

But since 2016, for couples who come under the new state pension, the right to claim a state pension based on a spouse’s NI record has been largely abolished. Many women will get a higher pension at retirement in their own right than under the old system, but when one person dies, there is now very limited scope for inheritance.

Royal London said families need to plan ahead for this potential financial squeeze. Firstly, couples should find out where they stand by checking 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.

Couples should also be careful with their finances earlier in retirement – if possible, build up a savings buffer earlier in retirement to help the surviving widow or widower cope with the financial shock of bereavement.

Finally, couples should consider a financial product that would pay out if one partner were to die –various products such as life assurance or term assurance might be worth considering for peace of mind if one partner were to pass away.

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