I’m worried about losing annuity income if my husband dies before me: Steve Webb responds

My husband has been retired for 19 years and has two annuities that pay small amounts each month.

They were hired upon retirement and the forms were completed by someone we knew who worked for a local financial services company.

My husband signed, but we were both present and we were never asked if, if my husband died first, the pensions would pass to me and his wife, so I think we were misinformed.

I called HMRC who attempted to locate the company. They are no longer in operation and the financial advisor has died.

My husband is now diagnosed with dementia and I will lose my pensions if he dies. Can these annuities be redeemed? My husband is 79 years old and I am 77.

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Steve Webb responds: Although annuity sales to retirees have plummeted in recent years, there are still millions of seniors receiving income from those they purchased years ago.

Unfortunately, as in your case, for the vast majority of these annuities payments will cease when the policyholder dies and there will be nothing for his or her surviving spouse.

The basic idea of ​​an annuity is that you give your pension fund to an insurance company and, in return, it promises to pay you a guaranteed income for as long as you live.

In the past, the vast majority of annuity sales weren’t much more complicated than that.

However, more recently there has been increasing attention paid to configuring annuities in a way that best suits your retirement needs.

This could involve providing for a surviving spouse or partner (joint annuity), creating protection against inflation (‘escalating’ annuities), or establishing an annuity that is only paid over a set period of time (‘fixed term’). annuities), perhaps to bridge the gap between the time you want to stop working and the time your other pensions become payable.

Many annuities now also pay more if you are in poor health (‘enhanced’ annuities) or if you have lifestyle factors such as smoking that can reduce your life expectancy.

When you go to an insurance company with your money, they will give you a variety of annuity quotes (as well as interest rates offered by other providers).

The highest annual income available will come from a ‘single life’ annuity (which ends when you die) with no inflation protection.

You can choose additional features, such as a surviving spouse pension, but as it costs more to provide, you will be offered a lower starting figure.

Most people buy an annuity without financial advice and, for obvious reasons, are attracted to the highest figure quoted.

This is especially true when this is the first figure they see. This is part of the reason why individual annuities have tended to dominate.

In your case, a financial advisor may have been involved. If so, she certainly should have talked to her husband about her options, including getting her to think about what would happen if he died first.

In terms of obtaining redress for potential mis-selling at this stage, I’m afraid there is little that can be done. In part this is because the company in question and the advisor are no longer present.

But it is also the case that by choosing a single annuity, your husband has so far received more money than he would have received with a joint annuity.

Although you have potentially lost out by the absence of the spouse’s pension, he has gained for the past 19 years by choosing the higher initial pension, so the original decision was not necessarily bad.

You ask about the possibility of “cashing in” these annuities, but I’m afraid that’s not an option.

When the policy was originally sold, your husband entered into a contract with an insurance company and now he cannot change his mind.

In exceptional cases, insurers may charge very small annuities, but this is largely an exception and they cannot be forced to do so.

For those currently receiving an annuity, it is worth checking whether or not a spousal pension exists.

Although, as you may have discovered, there is unfortunately little that can be done to change the situation, being fully informed would at least help people plan ahead for what will happen when the first member of a couple dies.

As I said at the beginning, many fewer annuities are sold today than in the past, although the recent rise in annuity rates has sparked renewed interest in the market.

But in my opinion, anyone buying an annuity today should think carefully about the value of a joint life policy.

For couples who fall under the new state pension system, there is little or no inheritance of state pension rights when one spouse dies, so there may be a drop in household income at this time.

Maintaining some of the existing annuity in that situation should help cushion the financial shock of bereavement and may be worth the sacrifice of a lower initial pension rate.

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