Changes to the state pension system and the decline of final salary schemes could mean that spouses who are widowed may face a “major income shock”, LCP has warned.
Analysis from consultancy LCP, published this weekend (August 7), found bereaved spouses who retired on the new state pension could see a significant fall in their finances compared to those who retired and were bereaved in the past.
The firm warned that under the old system a woman’s standard of living dropped by around 9 per cent when her husband died, but under the new system her standard of living drops by around 24 per cent.
It said before the introduction of the new state pension in 2016, the state pension system was made up of ‘derived’ pension rights where women could get pensions based on the contributions of a husband, ex-husband or late husband.
However, under the new rules, when a husband dies, his wife will generally inherit little or nothing of his state pension.
This means that her standard of living could fall much more sharply when her husband dies than under the old rules where her state pension as a widow would be enhanced, Steve Webb, partner at LCP, explained.
The same argument could be made to some extent of surviving husbands. However, because of gender pension inequality, a surviving husband is likely to retain a higher proportion of the couple’s total income in retirement than a surviving wife.
Secondly, people used to have defined benefit pensions which provided generous widow’s pensions when the husband died.
But now people have defined contribution schemes and although a widow may inherit any balance in the pot when her husband dies, if he dies later in retirement the pot may have been run down to a low level.
LCP and advisers have joined forces to urge recently-retired couples and those approaching retirement to check their position and make sure they are better prepared.
Webb said: “Coping with bereavement is hard enough, but coping with a sharp fall in living standards thereafter is even tougher. Although the new state pension generally pays more to women in their own right at retirement than the old system, it has very limited provision for widows and widowers.
“Newly retired couples and those coming up to retirement need to find out where they would stand with state and private pensions if one of them were to die and to explore making additional provision to cushion the financial impact of bereavement.”
Darren Cooke, a chartered financial planner from Red Circle Financial Planning, said: “This is one of those situations where forewarned is forearmed. Just being aware of the change in income if one partner dies allows the couple to plan for it and consider how the widow(er) could cope.
“In early retirement the couple need to be careful of taking on debt, as even small interest payments could be a big part of a reduced income. Also, be careful of spending down savings too quickly as they may be better spent to support the survivor once the income drops.