Relying on another’s pension: 3 ways it could put your retirement at risk

According to a recent article in Pensions Age, research suggests that nearly 4 out of every 10 women plan to rely on their husband’s or partner’s retirement fund later in life.

The findings are perhaps unsurprising given that women often earn lower incomes than men. This is due to a variety of reasons, including the fact that women more often take lower paid roles to juggle childcare responsibilities. As such, the decision to rely on their partner’s or spouse’s pension is understandable.

That said, doing so may be a high-risk strategy. If anything happens to them or your marriage, you could end up with a much smaller pension that means you can no longer afford the lifestyle you expected in retirement.

Discover three ways relying on someone else’s pension could jeopardise your retirement plans, and how you might achieve financial independence and the retirement you deserve.

1. Death

If your spouse or partner dies, it could affect your retirement in two ways:

They die while building the pension

If the worst happens while your partner or spouse is still building their pension pot, it will mean pension contributions will stop. As a result, you are likely to have a smaller retirement fund than expected when you reach retirement age, which could significantly reduce your standard of living.

You may receive half the income you expected

Many final salary workplace pensions provide the surviving spouse with 50% of the pension holder’s retirement income. This might again significantly reduce the lifestyle you can then afford when you finish work.

You might receive death in service from your partner or spouse’s employer. However, as this is typically between two and four times someone’s salary, it may not be enough to guarantee the lifestyle you’d hoped for in retirement.

2. Inability to work

If the pension holder is diagnosed with a long-term illness and cannot work, it’s likely that they will have to suspend contributions to their pension. This could significantly reduce the size of their pension when they reach retirement age, meaning the lifestyle you’d both planned is no longer affordable.

This situation might also arise if the policyholder is made redundant and struggles to find work. If they have to take a pay cut, they may struggle to make contributions at the same level that they were previously, which again could reduce your joint lifestyle in retirement.

3. Divorce

Despite pension pots potentially being one of the most valuable assets in the marriage, all too often they are not included in divorce settlements.

Research by Legal & General found that 24% of people waive their rights to an ex-spouse’s retirement fund instead of asking for a pension sharing order. Ensuring you receive a share of an ex-spouse’s pension could be vital to achieving financial security in retirement and living the lifestyle you want.

A financial planner could help confirm the value of your ex-spouse’s pension, the income it might generate for you in retirement, and the different ways you could consider including it in your settlement.

You might be able to ensure future financial independence

If you are currently intending to rely on someone else’s pension in retirement, you might want to consider the following two options. They could help ensure your financial needs are met in retirement, whatever the future holds.

Start your own pension

This is an excellent way of securing your own financial independence. Building even a small pension might be enough to counter any shortfall suffered by the other person’s fund if they cannot work or if they die.

It could also boost any divorce settlement you receive, again helping ensure you enjoy the retirement lifestyle you deserve.

If you make contributions into your retirement fund, you will receive tax relief as long as you don’t breach the Annual Allowance. This means the government will boost your pension by 20% if you’re a basic-rate taxpayer, 40% if you’re a higher-rate taxpayer and 45% if you’re an additional-rate taxpayer.

As such, every £100 contributed costs you £80 as a basic-rate taxpayer, £60 as a higher-rate taxpayer and £55 if you’re an additional-rate taxpayer. In 2021/22, the allowance is up to £40,000 or your total earnings, whichever is lower.

Take out protection for the policy holder

If you are not able to contribute to your own pension, you may want to discuss life and income cover with the pension holder. Life cover would typically provide you with a lump sum should the worst happen, which you could then invest into a pension for yourself.

Income protection could allow the policyholder to continue making contributions into their pension, which might ensure you both enjoy the standard of living in retirement you hoped for.

Speaking to a financial planner could help confirm which type of cover is likely to be most suitable, and help you find the most cost-effective option.

Get in touch

As specialists in providing holistic, female-focused financial planning, we have a proven track record in helping women with their pensions, investments, and wider wealth strategy.

Key to this is the financial coaching we provide, which helps build confidence and understanding around your wealth. This in turn helps you become more financially independent and more comfortable when making financial decisions, allowing you to look forward to a brighter tomorrow and a lifestyle you aspire to.

If you intend to rely on someone else’s pension and would like to discuss any of the points raised in this blog, please get in touch. If you have any questions about your wealth or investments, call us on 0116 262 1414 to find out more.

Please note

This article is for information only. Please do not act based on anything you might read in this article until you have sought professional advice.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

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