Can your spouse depend on your defined benefit pension?

When you pass away your surviving spouse may be eligible to receive an on-going pension from your defined benefit pension scheme.

What is a defined benefit pension?

A defined benefit (DB) pension scheme is one where the amount you’re paid in retirement is based on how many years you’ve worked for your employer, the salary you’ve earned and the accrual rate.

Many married couples depend on the pension benefits of the higher earner in retirement. This blog sets out to highlight some of the things you should be aware of, to ensure your financial security in retirement is robust as possible. This blog will also outline some options you may wish to explore.

Why your pension benefits need careful consideration

It is not uncommon for couples to be financially dependent on the pension benefits of one singular pension. If the pension holder passes away this can leave the surviving spouse in a vulnerable financial position.

 Case study

John and Karren

John’s DB pension will provide him an income of £40,000 per annum for life in retirement.

Karren does not have a pension.

Tragically, John dies aged 62 – Karren now receives only 50% of John’s pension, creating a position of financial difficulty as Karren’s on-going living costs exceed the £20,000 per annum she now receives.

Karren is now too old to work meaning she is unable to supplement this income. As a result, she is forced to drastically change her lifestyle.

Further considerations

For married couples where the surviving spouse is over 10 years younger than the deceased spouse, the amount is normally reduced by 2.5% for each year over 10. For example, if Karren was 14 years younger than John, she would receive £16,000 per annum. 

What options do you have to avoid this?

If you have not yet started receiving pension benefits from your defined benefit pension, you may be eligible to transfer your pension benefits into a SIPP or QROPS. By doing this, members can exchange an annual income for a one-off lump sum amount.

Using the case study again, John could have hypothetically exchanged his £40,000 per annum for a lump-sum amount of £1,126,000. This money could then have been put into a self-invested personal pension (SIPP) account allowing John and Karren to live off the growth.

Transfer values vary*

If the SIPP grew by a conservative amount of 4% per annum after charges this would provide John and Karren with an income of £45,040 per annum without reducing the lump sum amount.

Moreover, if John dies at 62, Karren is now the sole owner of the pension pot (assuming he has nominated her), meaning her lifestyle can be maintained. When Karren eventually dies, any money which is left in the pot can be passed to her dependents.

Summary

Spousal benefits are just one of the many advantages of using a SIPP, if you would like to explore your eligibility please click on the link below to register for a complimentary pension review.

 

 

 

 

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