For most people, ensuring their wealth is passed on to their family is one of the most important areas of financial planning.
Prior to changes to pension freedoms legislation in April 2015, many people who passed away would have had their pensions hit by a hefty 55% pension death tax. Since the changes however, it has become possible for pension holders to set their arrangements in a way that allows their pension benefits to long outlive them and provide an income to their loved ones, even once they are gone.
There is now the opportunity to leave all your pension benefits to loved ones in a highly tax efficient manner. Unfortunately, many pension contracts are outdated and will still not allow full flexibility.
As a professional in the industry, I speak to many men and women who aren’t aware of what their entitlements would be should anything happen to their husbands or wives.
Expatriate women or the wives of those who have moved overseas are often known as a “trailing spouse“. You take care of the family while putting your own plans on the backburner – not always an easy or rewarding job. Some or many often rely on their husbands’ income / pensions to support the family, so I feel that it is crucial for women to be taking a more proactive role in safeguarding their future by looking into this.
It is also not uncommon for the roles to be reversed or for both husband and wife to have pensions with death benefits that neither are aware of.
Another crucial point to note is, with most defined benefit schemes a child’s pension is only available if the child is under the age of 18, or 23 and in full time education. This is incredibly important for divorcees or single people with adult children.
Typically, the pensions that don’t allow the same amount of flexibility are Defined Benefit schemes. These are often known as final salary pensions or old-style company pensions.
Many who worked in Oil and Gas, Construction, Banking or Aviation for example, prior to the turn of the millennium, are members of a defined benefit scheme.
These pensions work differently to Defined Contribution schemes, the type that most people have nowadays. The key difference is that a defined benefit pension is not an asset that belongs to the member, it is a promise to the member that the scheme will pay them a certain amount from a set retirement age.
Given the asset does not belong to the member, it therefore can’t be passed on to the members wife/husband or children in the same way a defined contribution pension could be.
So, what happens when the member dies?
Often, these schemes will pay a spouse 50% – 60% of the annual amount the member was set to receive or currently receiving. Once the spouse has passed there will only be a provision for children if they are below a certain age, as mentioned above.
To highlight why this is such a critical subject to me, here is an example from a case I dealt with last year:
A 51-year-old lady approached me on behalf of her husband. After moving overseas 7 years ago they lost track of his pension. He had been with his previous employer for 19 years and they were confident that if anything should happen to him, there would be provisions for his family in his retirement plans. I requested the information from his scheme along with a cash equivalent transfer value (CETV). This CETV is the amount that the scheme would be willing to pay him to leave the scheme and give up his guaranteed benefits.
The scheme came back to me saying that his annual pension was £15,792. Should the member die after the age of 65, the age at which he would begin receiving his pension, his wife would be entitled to 50% of this, so £7,896.
However, if he died before 65, she would be entitled to a lump sum payment to the value of 5 times his annual benefit, or £78,960.
Their children were 24 and 26 so they would not be entitled to any benefits.
The CETV offered was £600,096.
Unfortunately, between the time of requesting the pension valuation and our next meeting, her husband passed away at age 53, which resulted in the scheme paying out a lump sum of GBP 78,960 as opposed to what would have been a pot of GBP 600,096.
This is just one example of many. Whilst her husband passed relatively young, the situation would have been the same if he had died anytime in the next 12 years. Time and time again we see spouses thrown into relative poverty at a time when things are the most difficult for them.
There is a real opportunity to secure these benefits and put provisions in place to avoid such unfortunate circumstances. Unfortunately, it is often the case that the men I speak to are unaware of what their spouse would be entitled to, or reluctant to look into it for a variety of reasons. They often brush the subject off rather than sitting down to do the math's and looking at the statistics, factoring in their health and all the possible outcomes.
It is therefore essential for any spouse reading this to take it upon themselves to investigate. It is your right to know exactly where you will stand should the worst-case scenario happen. Please get in touch if you would like to look into this and we will be happy to help.