Many savers are relying on their partner’s pension to help fund their retirement, leaving them vulnerable in the event of a sudden death or relationship breakdown.
Only 27% think their own pension will be enough in isolation, according to an Opinium survey conducted on behalf of investment platform Hargreaves Lansdown. The vast majority (73%) are planning to rely on their partner’s retirement savings as well.
Survey respondents were aged 18 to 65+, meaning the results are likely to reflect younger savers’ expectations as well as current pensioners’ experiences. That said, the results are still concerning.
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“If you are planning for retirement together then, to an extent, there will be reliance on both people’s pension to make the plan work. However, both partners also need to be in a position where they could get by in retirement on their own if they had to,” said Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.
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Nineteen percent of respondents said they had a similar sized pension to their partner, meaning they both needed each other. Fourteen percent said their partner had the biggest pension and would cover most of the costs in retirement. Meanwhile, 5% said they didn’t have any pension at all.
“It's an issue that should get better with the introduction of auto-enrolment, as more people are now saving into a pension, but it’s important to engage and get the most out of it,” Morrissey said.
Considering the potential impact of events like divorce is also important. While you might be entitled to some of your partner’s pension if you split up, the amount you receive will depend on the terms of the divorce settlement.
People who live alone also face higher living costs (per head) than those who share with a partner. Research from pension company Standard Life suggests single pensioners may need £225,000 more in their retirement pot than couples to achieve a moderate standard of living once they stop work.
Woman at particular risk of pension shortfall
Women could be particularly vulnerable given they tend to have smaller pensions. This is largely due to a persistent gender pay gap, plus time taken out of work to pick up caregiving responsibilities.
The gender pension gap is a whopping 48% among those approaching retirement, according to the Department for Work and Pensions (DWP). The average woman aged 55-59 has built up a private pension worth £81,000 compared to £156,000 for the average man.
If you bought an annuity paying a rate of around 7% at age 60, these pension pots would convert into an annual income of approximately £6,000 for women and £11,000 for men. A typical woman could be left with £5,000 less each year as a result.
This is reflected in the latest survey data from Hargreaves Lansdown. While 31% of men said they were not relying on a partner’s pension, this fell to 22% among women.
Divorce: are you entitled to your partner’s pension?
You may be entitled to a share of your partner’s pension if you get divorced, so it is important to discuss it before reaching a settlement.
After the family home, a pension is often a couple’s most valuable asset, accounting for around 35% of total household wealth, according to data from the Office for National Statistics.
Failing to factor in pensions when dividing up assets could leave one partner vulnerable in later life, as they miss out on retirement income that would otherwise have been theirs.
This often impacts women, particularly if they have taken time out of work to look after young children, missing several years of pension contributions and career progression opportunities as a result.
“Just 13% of divorcing couples consider pensions when dividing assets with their partners, and 23% actively waive their rights to a share of their partner’s pension, which can dramatically impact their finances in retirement,” said Lorna Shah, retirement expert at financial services company Legal & General.
“When dividing finances, it is important to look at everything… and, if possible, to take proper financial advice.”
Splitting pension assets is often complex, but a professional financial adviser could help with questions about how to value them, the tax implications and more.
What happens when your partner passes away?
If you are reliant on your partner’s pension, you also need to consider what will happen if they pass away before you. A lot will depend on the type of plan they have – i.e. defined benefit or defined contribution.
If the person who has died was retired and had a defined benefit plan, their spouse or civil partner will typically continue to receive a reduced taxable pension. You should check the rules of the scheme to ensure this applies to you, and can do this by contacting the pension provider.
If the person had a defined contribution plan, they can leave their unused pension assets to a beneficiary. If they used their pension assets to purchase an annuity, the amount of income you receive from the annuity going forward will depend on the terms of the scheme.
Single-life annuities only pay money out to the scheme-holder while they are alive. Meanwhile, joint-life annuities continue to pay income to the survivor, such as the spouse or civil partner. These are often more expensive to purchase.
Things can become complex for unmarried couples. Do your research to make sure the surviving partner inherits any assets as intended.
Morrissey explains: “You can live with your partner for years and raise a family together but there is no such thing as common law marriage and this means a cohabiting partner could be left with nothing.
“This is why it’s hugely important that documents such as expression of wish are kept up to date so administrators have a clear idea of what your circumstances are and can distribute benefits in line with your wishes.
“Not keeping these forms up to date risks an ex-partner getting the money at the expense of a current one. This can cause a lot of worry, upset and potential financial hardship.”
There could also be inheritance tax implications when leaving assets to an unmarried partner. While married couples and civil partners do not have to pay inheritance tax when they inherit assets from their spouse, cohabiting partners are not exempt in the same way.
