Risks in Retirement: Are you prepared?


There are many risks to navigate in later life, including those which can impact your financial health. Added to that list is a potential financial shock that comes about as a result of a little-noticed change to the state pension system. The risk, identified by insurer Royal London, follows a state pension system charge in 2016.

That change could result in older couples facing an unexpected financial shock when one of them dies. The change means a typical pensioner could lose between one-half and two-thirds of their household income following such a bereavement. The death of a partner in retirement often results in a fall in household expenditure, although not usually by as much as this forecast fall in household income.

This means potential living standards can be squeezed. 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.”

So, what has prompted this new retirement risk?

Before the state pension system was changed in 2016, the death of one member of a married couple in retirement would result in the surviving spouse claiming an enhanced state pension, based on the late spouse’s National Insurance record.

The introduction of a new state pension system in 2016, came with a new set of rules for bereaved spouses. Instead of the ability to claim an enhanced state pension, there is now minimal scope to inherit a superior National Insurance record.

Pensioners in receipt of an occupational pension income in retirement will often continue to receive half of the income, in the event of the spouse dying. Where retirement income comes from a standard “single-life annuity”, it’s often the case that no future income passes onto the surviving spouse. Ongoing income in this scenario will depend on whether death occurs during the guarantee period for the annuity, which is typically the first 5 or 10 years.

Things to consider

There are three key matters for couples approaching or in retirement to consider that will help them deal with this potential retirement income risk:

  • Firstly, you should find out where you stand. Finding out your likely financial position means checking how much occupational or private pension income would continue to pay, should your spouse die before you in retirement.
  • Secondly, you need to be careful with your finances earlier in retirement. One way you can mitigate this retirement risk is by building up a pot of savings or investments, creating a useful financial buffer in the event your income suddenly falls.
  • Finally, you should consider a financial product that would payout if one partner were to die. This financial product could take the form of life assurance, although the cost of such cover can be expensive as we get older.

Regardless of the action, you decide to take; it’s essential to recognise this retirement risk and plan to mitigate its financial impact on your life. MHA Henderson Loggie Financial Planning would be happy to help.