How can I ensure that my spouse or partner keeps getting a pension if I die first?

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17 December 2021
Many people who attend my retirement education courses ask how they can ensure that their pension will go to their spouse, or partner if they pass away first. 

Some years ago, I had a sad phone call from a lady whose husband had just died, a year after going on pension, leaving her with no income. When retiring from a modern retirement fund the member must choose their own pension. Her late husband had arranged his pension privately with the help of a financial advisor from a major bank. I found it interesting that, according to her, when she asked her husband if she could sit in, his comment was “Don’t you trust me?”  She felt that he was so stressed at the time that she would serve no purpose by insisting, and so she backed off.

Her husband contracted for a guaranteed pension with a well-known life office but due to the inexperience of the advisor, his wife was not included in the contract. That meant that when he died the pension ceased at once. So, at 64 years of age, his wife was left without an income and dependent on her children who were not particularly well off. The other option, as explained in my other articles, would have been to invest in a living annuity, which means your income isn’t guaranteed, but at least your money can pass to the family. The risk with a living annuity is that your money may run out before you die. We will discuss this in more detail a bit later in the article.

The life assurance company had fulfilled the terms of the contract and there was no bending there. The bank apologised and offered her a settlement to the value of 3 months pension income. Carelessness or inexperience had led to this tragedy. Had she and her husband understood how pensions work, the heartbreak could have been avoided.


Guaranteed conventional pensions (life annuities)

Contracting a pension is not something to take lightly. The above case relates to pension continuation with what is known as a guaranteed or life pension, which I will deal with first. The second part of this article will relate to pensions continuing to spouses with living annuities. The name “annuity” is the same as “pension”.

A life pension is obtained from life assurance companies. Because of the important guarantees included in this product, it needs to be provided by a large financial institution. The process starts with you asking them how much pension they will offer you for your retirement capital.  In other words, you ask them to give you a quote.


The size of the pension they will offer depends on several factors. Two guarantees apply automatically before the factors are considered: these are:

  • That these pensions are guaranteed to be paid until the second (and last) person in the couple dies and;
  • These pensions are guaranteed never to decrease, but rather the minimum guaranteed pension payable is increased every time an increase is granted to the pension.


The factors that will further influence the amount of pension that you will receive are:

  • The ages of the pensioner and spouse (if your spouse is to be included) at the time of starting the pension. Including your spouse, as you can see from the previous example, is vital. It must be done, and it must be done right.
  • What percentage of the pension received while both are alive do they want to go to the surviving spouse? This can be almost any percentage, although most people seem to see 100% as fair. If they choose 100%, the pension will not reduce at all when the pensioner dies.
  • How many years of guaranteed pension do you want? These pensions are normally paid until the death of the second person in the couple, and this is a very important guarantee. But if both die very shortly after retiring, the pension will stop at once. This is unlikely but certainly not impossible. Many families worry that if it does happen, they will not receive fair value for the money they invested. Because of this concern, a provision was introduced that allows pensioners to ensure several years of payment, regardless of when the last member dies.  For example: If both members of a pensioner couple choose a 10-year guaranteed period of payment and then both die after two years on pension, the pension will continue to be paid to whoever they nominate as beneficiaries for the remaining eight years.


These provisions apply to all life annuities regardless of how their annual pension increases are conferred. Had the lady’s husband mentioned at the beginning included her as a pensioner with what is called a survivorship benefit of 100%, his passing would not have made any difference to her income.


Living annuities

Now, we’ll move on to the issue of living annuities being passed on to surviving spouses or partners. It’s important to clarify this, as living annuities have, for a long while, been the most popular product for producing an income in retirement.

The procedure on the death of a living annuity pensioner is straightforward, but the outcome may not be. When the pensioner dies the living annuity contract, which is an insurance policy, may be bequeathed to a beneficiary. This beneficiary could be anyone the pensioner chooses but for now, let’s make it the spouse.

Ownership of the living annuity policy passes to the spouse who becomes a pensioner as though it is a new contract.  There are variations in these policy contracts. Some allow the beneficiary to withdraw a cash lump sum of up to one-third of the value while using the rest for a pension.  Others do not allow the beneficiary to withdraw any cash, so that the full value must be used to supply a pension for him or her.

The new pensioner must choose an income equal to at least 2.5% of the capital remaining, and at most 17.5%. Once that level of pension is chosen, the pensioner may change those percentages once a year.

The new pensioner must also choose the investments in which the capital is to be invested. Most leave the investments exactly as they were until, or unless, they feel the need to amend their portfolios. When this pensioner dies, they may leave whatever capital is left to a beneficiary of their choice, which could be a child.

If the last beneficiary decides to take the remaining capital, that lump sum will be taxed as a death benefit, which may reduce it quite a bit.

The pensioner spouse may also invest the capital left on the death of the first pensioner in a life annuity and then the applicable rules will apply. This aspect is dealt with in the first section.

This sounds pretty clear, but it all depends on there being a worthwhile amount of money in the living annuity account at the time of the first pensioner’s death. Living annuities have no guarantees of any kind. The first pensioner needs to pay very careful attention to managing the living annuity so that there is money to leave to a spouse or partner. And this means careful management, avoiding drawing too much income, or paying too much in investment, advice, or administration costs.





Dave Crawford CFP®

OUTvest is an authorised FSP. All investments are exposed to risk, not guaranteed and dependent on the performance of the underlying assets. Ts and Cs apply.

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