Do we need to help ‘tomorrow’s widows’ prepare for an income shock?

When the National Insurance system was introduced after the Second World War to provide state pensions, it included comprehensive provision for married women where they were financially dependent on their husband. This included an elaborate system of ‘derived rights’, primarily to protect married women in the event of widowhood (or divorce)[1]. More recently, most Defined Benefit occupational pension schemes will pay a survivor’s pension to a widow or widower and, increasingly, to a surviving unmarried partner.

However, two major changes to the pension landscape risk undermining the support which is available following a bereavement.

First, the change to the new state pension, which affects those reaching pension age after 5th April 2016. The new system is primarily based on the National Insurance record of the individual rather than on rights derived from a spouse, ex spouse or late spouse. There are some limited transitional protections, but the new system is essentially based around the individual. This means that if one partner dies, their pension dies with them.

Second, Defined Benefit occupational pension rights are become much rarer outside the public sector. The number of private sector employees still accruing new DB rights has fallen steadily and now stands at only around one million. Recent research by LCP suggested we are close to ‘peak DB’ for those retiring now and that future cohorts of retirees will have progressively smaller average DB rights. In time this will translate to smaller ‘survivor’ pensions for widows.

Taken together, these two trends could mean that women who are currently in married couples but who are widowed in future could face a major income shock alongside being bereaved.[2]

It could be argued that although the death of the husband has led to a loss of one stream of income, it will also lead to lower household outgoings and this will partly offset the loss of income. However, although certain costs may fall when one person dies (eg household energy consumption, metered water usage), many will either be unaffected (eg TV licence) or will only reduce in part (eg 25% reduction in council tax bills for being a single person).

To try to compare living standards across households of different sizes, the standard approach is to use an ‘equivalence scale’. Such scales are implicit in, for example, relative benefit rates for households of different sizes and they are widely used in official statistics.

A simple basis for comparing the income needs of a single person in retirement and a couple would be to look at relative rates of Pension Credit for single people and for couples. In 2021/22, the main pension credit rate for a single person is £177.10, whilst for a couple it is £270.30. On that basis, the benefits system assumes that a single person needs just under 66% of the income of a couple to achieve the same standard of living.

The problem is that the income received by a widow may be well under 66% of the income that she and her husband received before she was bereaved, especially following recent change.

Two numerical examples illustrate the point, focusing mainly on the changes to the state pension system.

In the first case, based on the old state pension system, the husband has a full basic state pension, and additional earnings-related pension (either from the state or from an occupational pension) and his wife has a ‘married woman’s pension’. As the table shows, when the husband is still alive, the couple have a combined weekly income of £283.45.

When the husband dies, his wife’s basic state pension is reassessed and brought up to the full basic rate and she receives half of his earnings-related pension. This takes her weekly income to £169.30.

If we agree that a single person needs about 66% of the income of a couple to have the same standard of living then this represents a fall in her standard of living of around 9%, as shown in the first able.

“Old world”, ‘traditional’ couple

Now consider the scenario where both members of the couple have retired under the new state pension and that the wife has built up a full state pension based on a combination of contributions and NI credits. In this case, the joint income is initially higher – two full state pensions of £179.60 making £359.20 in total (see table below).

However, when the husband dies, the wife is simply left with her own state pension of £179.60. But she would have needed an income of £237.07 as a single person to maintain the standard of living she enjoyed as part of a couple, so this is a fall of 24%.

This is a far greater fall in standard of living than under the old system.

“New world” – two full state pensions, no occupational pension

The world is, of course, more complicated than this. For example, in the new world more people may have Defined Contribution or ‘pot of money’ pensions where the surviving spouse can inherit any unspent balance and this could help to cushion the financial impact of bereavement. In addition, the widow may inherit assets (not least property) which could be used to support her standard of living.

Nonetheless, it is clear that, particularly in couples where the state pension contributes a large part of total household income, the loss of a spouse is likely to have a much more dramatic impact on living standards in the future than in the past. We need to do much more to make recently-retired lower income couples, as well as those thinking about retirement, aware of the potential financial impact of losing a spouse and to help them make appropriate financial plans.

[1] We refer in most cases in this article to ‘married’ couples, and this includes civil partnerships. State pension inheritance rights do not however apply to cohabiting couples, who potentially face even greater challenges when it comes to coping with the financial impact of a bereavement.

[2] The same argument could also be made to some extent of surviving husbands. However, because of gender pension inequality, a surviving husband is likely to retain a higher proportion of the couple’s total income in retirement than a surviving wife.