The pensions landscape has changed significantly over the past ten years, with considerable changes to the state-system and the decline of final-salary schemes. This has left many women in the dark as to how much money they would have to live on if they were to lose their loved one, writes Phoebe Turner, managing partner at Stowe Family Law, and Estella Newbold-Brown, senior solicitor at Stowe Family Law.
In addition to being three times more likely to be widowed, women can often be far worse off financially than men as they, on average, have 40% less pension wealth when they reach retirement.
Exacerbating this issue, widows may experience a 24% drop in household income after her husband dies, even when lower household costs are accounted for.
On top of this, in 2016, a new state pension was introduced, which replaced a three-tier system of basic, additional, and graduated state pensions with a single pay out: a single- tiered pension scheme. This system now has a flat-rate pension of a maximum of £179.60 ($241.16, €210.83) in 2021/22 per week.
Unable to claim
Before 2016, the system in place meant that women who were receiving a lower pension would inherit their husband’s pension when he died to top up their own, smaller, payments.
Now, in the majority of cases, women will be unable to claim on their spouse’s fund. It seems, then, that the safety nets which were once relied on have now been entirely discarded, leaving many widows at a loss as to their financial futures.
There is a generation of wives who have been plunged into turmoil, as their ‘traditional’ family set up, with the husband as the breadwinner, means they have no personal pension pot.
After the changes in April 2016, the pension inheritance rights for spouses completely disappeared, and personal contributions are now the only basis for pensions.
Ineligible
The new state pension is entirely reliant on an individual having made National Insurance contributions for at least 10 years, although this does not necessarily have to be 10 years in a row. Without this minimum number of contributions, retirees are usually ineligible for the single- tier pension.
The maximum level of the single-tier pension is £179.60 per week for 2021/22, the same as the 2020/21 rate, and is only payable to individuals with at least 35 years of National Insurance contributions and credits.
Some spouses who did not reach state pension age before 6 April 2016, and who have insufficient National Insurance contributions may not qualify for the single- tier pension at all. They may qualify for a proportionate single- tier pension if they have between 10 and 35-years’ worth of contributions.
In contrast, the old system had no minimum number of years to qualify for a state pension; the full basic state pension was only afforded to those who had contributed for a period of 30 years. However, a smaller pension was paid out which could then be added to with the additional state pension.
Furthermore, it was possible under the pre-2016 pension scheme to substitute National Insurance records of a deceased or former spouse if they had better National Insurance records than their surviving spouse. When instructing a pension expert in the past, it may well have been expected that the state pension would be dealt with by substitution of National Insurance Records.
Under the new state pension system, the surviving spouse cannot substitute their state pension for their deceased partner’s. Statistically, this is usually the wife, who, in many cases amongst those of retirement age, has a much smaller pension pot.
Moreover, the state pension age is creeping upwards which means people are waiting longer to receive this income and working longer. In November 2018, the state pension age was equalised for men and women and increased to the age of 65, rising again to 66 a year ago in October 2020. For that reason, those born between 6 April 1960 and 5 March 1961 will experience the state pension steadily reaching the age of 67. The age is expected to reach 67 by 2028.
Reviews
The general presumption is that when the state pension age is reviewed every five years, it will increase in line with life expectancy, although it will now remain the same for men and women.
However, this does now mean that maintenance agreements may need to be revisited, as the state pension may not be paid until a later date. Pension credits may be paid a lot later than expected as public sector pension schemes may be moving or may have moved their normal retirement ages in line with the state pension age.
The complexities of the new system mean that couples should be encouraged to start making considerations as early as possible, which will then cushion the stress and grieving when their spouse passes away.
Putting these plans into action and consulting experts in the field will ensure that affairs are in order and the new scheme cannot take them by surprise. It is also worth noting, of course, that changes are constantly being made so being aware and engaged with the pension process is more important than ever.
This article was written for International Adviser by Phoebe Turner, managing partner at Stowe Family Law, and Estella Newbold-Brown, senior solicitor at Stowe Family Law
