Financial affairs can be… complex. Navigating income, outgoings, taxes, benefits, savings, investments, mortgages, loans and the rest isn’t made any easier by the constantly shifting sands of politics and policy as the powers that be attempt to cut costs and balance the books without alienating too many voters.
In fact, in their ideal world we wouldn’t even realise our finances were being tinkered with.
Despite the army of financial and political experts, analysts, data geeks and consumer campaigners who pore over the fine detail of each tax change, budget announcement and policy detail the occasional tweak slides through unnoticed. And sometimes those quiet changes have fundamental effects in real life.
Which is why a subtle change introduced back in 2016 that could mean a huge financial shock to older couples has only crept into the light this week.
And yet it could mean such a big drop in income at the worst possible time that experts are now warning it needs to be a big part of the financial plans of millions of people, especially older women.
So what is this sneaky tweak?
Until 2016, widows and widowers could receive a boost to their basic pension as well as a percentage of their partner’s second state pension or Serps when they passed away based on the deceased partner’s National Insurance record.
Now though, if you’re covered by the new state pension system you probably won’t get anything from a spouse’s state pension when they die. In a bid to simplify an impenetrable raft of rules and restrictions, the underlying valuable benefit has been quietly swept away too.
While the good news is that women now usually receive a larger pension in their own right, a typical pensioner could now see their total household income fall by between half and two-thirds following bereavement.
With outgoings usually staying relatively high including rent or mortgage costs, car-related expenses and even energy, water and food bills, a grieving widow or widower will have to battle a squeeze on their living standards at the same time.
“As well as the emotional impact of bereavement, losing a spouse in later life can have a huge impact on living standards,” said Steve Webb, director of policy at Royal London. “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.”
Experts are now urging those approaching retirement to look carefully at the terms of their state, company and/or private pension to see how much would be passed on.
If you are unsure about your state pension rights, the government website goes through the options.
Meanwhile, after a lifetime of retirement saving, those approaching retirement are being advised to spend their money carefully in the early years and think about setting more money aside while there are two incomes coming in to fill the gap. Couples could also look again at life insurance or a similar policy.
Those people considering a single life annuity in particular are being urged to tread carefully as calculations show a couple both on the flat rate pension with one single life annuity could see the household’s income drop by 66 per cent when one partner dies.
The most common type of annuity, these policies have no provision for a spouse beyond a minimum guarantee period.
Couples who are both on the full flat rate pension with no other income and couples who also have one company pension would see their household’s income drop by 50 per cent according to Royal London’s calculations.
But while death in older age is sadly par for the course, further changes made from April 2017 have seen the benefits available to all bereaved Brits drop significantly.
Following the death of a spouse or partner a bereaved person will now receive a tax-free lump sum of £2,500 if they don’t have children or £3,500 if they do, plus a monthly tax-free payment, again depending on family situation of either £100 or £350 for 18 months.
Under the new system, bereaved families with young children are likely to be the hardest hit, as they will now only get support for 18 months instead of until the youngest child leaves school. The 2017 changes mean some of the UK’s lowest income families receive £31,000 less than they would have done under the old system, while the average working widowed parent could now receive £12,000 less in total.
More details about claiming benefits after the death of a partner are available from the government’s information pages on gov.uk