If you really love her: talk to her about a pension

It's hardly the most romantic notion in the world, but one financial boffin has suggested that when you go home tonight, you ought to turn to your other half and utter those five little words: "Do you have a pension?"

It's not going to kick off an evening of love and romance, but it might start a particularly eye-opening conversation that could save you from long term disaster.

The suggestion comes from Kate Smith, Aegon's Head of Pensions, who has been looking into the retirement incomes that people leave each other after their death.

Traditionally things were pretty straightforward: the husband worked while the wife looked after the family. Then the husband retired nice and early on a generous final salary pension - and after he died, the scheme would continue to pay a proportion of the pension to the wife until she died.

Unsurprisingly the Aegon study found that amongst much older people, this remains the norm. Some 75% of the over 75s have made pension provisions for their spouse. As Smith says: "The fact that the majority of those above age 75 have pension provisions for a spouse is probably down to common practice in defined benefit schemes, meaning this generation didn't have to make a conscious decision."

Change

For those who have been building up pensions more recently, however, things look drastically different. In pension terms, both men and women are far less likely to retire with a finally salary pension with spousal pensions built into them. Instead they are more likely to have a defined contribution pension, which they will need to use to generate an income.

If they choose to buy an annuity they might opt to have some sort of spousal benefit built into it in return for a lower monthly payment - but equally they might not.

Theoretically, this shouldn't matter terribly much, because the world of work has changed dramatically too, so there's every chance that women have built up a robust pension of their own. As auto-enrolment beds in, this will be exactly what happens, as women and men start building up their pension savings when they first start work.

Smith says: "In some cases, each partner will be building up their own pension and this trend is likely to increase as automatic enrolment brings millions more into workplace pensions."

The gap

However, there's a gap before this takes effect, and in the interim for a number of reasons, many women haven't established a pension of their own. Women may have taken a career break for caring responsibilities, they may have worked but not paid into a pension, or they may have earned less than their other half and so chosen not to deplete this still further with pension contributions.

If couples don't talk about this, there's a chance that nobody is making provision for these women. The Aegon study found that just 47% of those aged 45-54 had made provisions for their spouse, while overall 25% of people surveyed said their spouse had no pension of their own.

Smith says: "With the shift away from defined benefit and with changes to state pensions meaning a partner will no longer receive a survivor pension, these findings suggesting younger and future generations of retirees are less likely to provide for their spouse are worrying."

What can you do?

She says the key is to talk about it. Hence her encouragement for an evening of pensions chat. She explains: "The current generation of defined contribution savers have to plan their pensions together more than previous generations."

She says that couples need to plan plenty of time in advance how they want to use their pension savings to benefit them and their partner. If they have a defined benefit pension, it's worth checking the rules for what their spouse would receive after they die - and whether this is sufficient to live off.

If they have a defined contribution pension, it may mean, for example, that they opt to buy a joint life annuity, so payments continue after the death of one of the couple. It's therefore worth doing the maths at an early stage to discover what this would mean for your monthly income - and whether you need to be putting more cash away into your pension to boost this.

Alternatively, you may decide that planning for the two of you means putting at least some cash into drawdown, where your partner can inherit any money you don't spend.

There's no one answer that's right for everyone, but as Smith points out, the one thing that does work for us all is gaining an understanding of what our future looks like with enough time to do something about it.