Life assurance could provide vital funds for the dependants of those who sidestep joint life annuities.
Since April this year, every individual over the age of 55 with a defined contribution pension has had the freedom to do with it what they wish. Retirees who previously found themselves confined to buying an annuity to provide an income no longer face such restrictions, and now have the option to keep their fund invested whilst taking income flexibly from options such as flexi-access drawdown.
However, those who shun ‘joint life’ annuities – that continue to pay an income to a surviving beneficiary – in favour of drawdown could unwittingly leave the financial wellbeing of the survivor in doubt.
Unlike with joint life annuities, there are no inherent income guarantees offered with unsecured pension options such as the newly created flexi-access drawdown. The amount remaining in the drawdown pot at any point in the future is an unknown quantity, and there’s always the chance that there will be nothing for the beneficiary to inherit.
“If you are taking advantage of the new pension freedoms, it may be wise to ensure your spouse or dependant family member receives a guaranteed sum to cover living costs after your death, if some form of guaranteed provision isn’t already in place,” observes Tony Müdd, divisional director at St. James’s Place.
Potentially, a ‘whole of life’ policy is one such solution. This form of life assurance guarantees to pay out a lump sum to beneficiaries on death; a pay-out which could be a source of much-needed funds for a dependant if there’s nothing left in the pension, or income isn’t available from elsewhere.
“The benefit of such cover is that the claim the beneficiary makes is assured, hence the name ‘life assurance’,” says Müdd. ‘Whole of life’ assurance can be more expensive than ‘term’ assurance, because the pay-out is inevitable. Anyone considering it should therefore discuss suitability and cost with their financial adviser first. The adviser will also be able to recommend the level of cover needed and whether it should be written in trust.*
Flexi-access drawdown may be the right solution for those who want to retain control over their own pension pot and take withdrawals at a rate that suits them, but it may not be appropriate if the aim is to guarantee income for a surviving dependant.
“Although the new freedoms present a host of new opportunities for those retiring, it’s not obligatory to make use of them,” adds Müdd. “If you want to guarantee the financial future of your spouse or civil partner then it might be best sticking to a joint life annuity – or if that isn’t right for you, looking at another form of guaranteed benefit such as that provided through life cover.”
* Trusts are not regulated by the Financial Conduct Authority.