Recent changes to state pensions and trends in private pension provision mean that women who lose their husbands could face a much bigger fall in their standard of living than in the past, according to analysis from consultants LCP.
Recently-retired couples and those approaching retirement are being urged to check their position and make sure they are better prepared. (Similar issues will also affect widowers, but they are more likely than widows to have larger pensions of their own to support them after a bereavement).
Prior to the introduction of the new state pension in 2016, the state pension system contained an elaborate system of ‘derived’ pension rights where women could get pensions based on the contributions of a husband, ex-husband or late husband. There provisions were largely swept away in 2016 with the new system focused on ensuring that each individual secured a decent state pension in their own right. Many women received higher state pensions at retirement as a result.
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.
In addition, in coming years fewer people will reach retirement with substantial final salary pensions. In the past, these pensions often provided generous widow’s pensions when the husband died. But new pension provision is increasingly in the form of ‘pot of money’ or Defined Contribution pensions where there is no ongoing pension. Although the widow may inherit any balance in the pension pot when her husband dies, if he dies later in retirement the pot may have been run down to a low level.
To illustrate this point, LCP have compared the position of a ‘traditional’ couple under the old system, where the husband has the larger state pension and the wife gets a ‘married woman’s pension’, with the position of a newly-retired couple today where both simply get a full state pension in their own right. The research finds that under the old system the woman’s standard of living drops by around 9% when her husband dies, but under the new system her standard of living drops by around 24%.
Commenting, Steve Webb, partner at LCP (pictured) 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”.
LCP asked three money experts for their tips for couples in this position.
Phil Billlingham, a chartered wealth manager and chartered financial planner at Perceptive Planning, encouraged people to realise how long their retirement finances may need to last and to think what financial products might best provide for a surviving spouse.
