Protecting against impact of bereavement on surviving partner's pension income?

michaels

Let us imagine a 'comfortable' retirement for a couple,between DC and state pension they have an income of 36k gross pa, so from 67 half of their income comes from state pension but from say 60 to 67 all comes from the DC pot.

All good except what happens when one partner dies. The DC portion is no problem but suddenly there is only 27k from 67 or whatever the date of death.  There will be some saving from being a one person household but I suspect not as much as the full 9k 25%.  Suppose that the saving is only 4k, that leaves a 5k gap in provision.

How can the this gap be best addressed and how much would it cost to get protection?

dunstonh

How can the this gap be best addressed and how much would it cost to get protection?

1 - saving more in your pre-retirement years to ensure both parties can survive in the event of the death of the other.

2 - take out a life assurance

3 - spend less 

4 - Find another partner after death.

Life assurance costs more when you are older.   It may well cost too much to be viable or palatable by the time you get to retirement age.

edit: 

5 - Equity release

michaels

Thanks
To replace say 5k of income from age 67 would take a pot of 170k. That is a lot of extra savings so it t would seem like there must be sensible life assurance options that cost less?

Marcon

michaels said:

Thanks
To replace say 5k of income from age 67 would take a pot of 170k. 

Even assuming you are holding that in cash, so no interest - are you planning to live to 107?

michaels said:

Thanks
To replace say 5k of income from age 67 would take a pot of 170k. That is a lot of extra savings so it t would seem like there must be sensible life assurance options that cost less?

Do some googling on life insurance or assurance (as you prefer - the two are often used interchangeably these days) or talk to a broker.

Linton

You should run some "what if" simulations on a spreadsheet or retirement planner model. 

I would expect the real risk to be in the first few years since if you have planned prudently most of the disasters you are prepared for wont actually happen and so you will accumulate  spare money vs the original plan.  So if the plan is tight limited life insurance for perhaps 5-10 years cover should be sufficient.

Thrugelmir

michaels said:

 The DC portion is no problem but suddenly there is only 27k from 67 or whatever the date of death. 

Only £27k? Seems a first world problem.  More than enough for a comfortable retirement. 

Don't retire at 60 if a higher standard of living is required in latter life. 

ukdw

An even worse scenario is where one half of a couple is above state pension age with a small DB pension in payment, and the other half is a few years below state pension age, with little or no pensions of their own.  

In this situation if the older person dies then the surviving spouse will have to survive on just the half of the DB pension inherited and no state pension for a few years - which could be a stretch if they haven't planned for it by for example retaining a decent amount of savings.

Marcon

ukdw said:

An even worse scenario is where one half of a couple is above state pension age with a small DB pension in payment, and the other half is a few years below state pension age, with little or no pensions of their own.  

In this situation if the older person dies then the surviving spouse will have to survive on just the half of the DB pension inherited and no state pension for a few years - which could be a stretch if they haven't planned for it by for example retaining a decent amount of savings.

Or two-thirds, which is a common survivor's benefit in a DB scheme - but certainly worth ensuring that couples know what the other's pension scheme would yield in the event of their death.

Thrugelmir

ukdw said:

In this situation if the older person dies then the surviving spouse will have to survive on just the half of the DB pension inherited 

One of my older DB schemes is only a third to the survivor. 

Mickey666

That's a disadvantage of a DB pension (though a 2/3rd spouse pension would help significantly).
The problem with pension planning is not knowing when you'll die.  For example a DB pension is great if you're Captain Tom but no so great if you checkout at 80, where the chances are you'd have been better off transferring out to a drawdown pension and leaving a lump sum for your partner when you go.  Check out under 75 and that remaining pension pot is inherited tax-free, so that's a potential 40% increase in value straight away!
It's ironic given the immense uncertainties in retirement that an inflexible DB pension is still generally considered to be the gold standard.

jamesd

michaels said:

To replace say 5k of income from age 67 would take a pot of 170k. That is a lot of extra savings so it t would seem like there must be sensible life assurance options that cost less?

Plan for state pension deferral and set aside 50k. Defer funded by the 50k and the job is done. This should be in the initial plan and perhaps more as longevity insurance, my common suggestion.

You seem to have used a 2.9% replacement rate. That's well below even very cautious safe withdrawal rates so another alternative is to use a SWR and gradually buy annuities as age and health cause what they pay to exceed what the SWR pays. HL are currently quoting standard single life RPI annuities for a 100k purchase at

55 £1,662 
60 £2,039
65 £2,786
70 £3,683
75 £4,800

5k at 75 would cost 104k. Add 5k a year for 8 years takes it to 144k. Less if health or lifestyle factors reduce life expectancy. 5k at 70 would cost 136k, plus 3 years of 5k so 151k.

That age 75 rate is above some SWRs so some with a cautious bent and low inheritance motive might start converting capital to income around then, though that is single life so for a couple it doesn't yet match a SWR.