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The spouse trap

When is a spouse not a spouse? The subject of sex might not be automatically connected with in-depth pension knowledge but in many instances a client&#39s relationships should play a major role inthe fact-find.

Frequently in pension schemes there is provision for a pension to be payable to one or more dependants of a deceased scheme member.

But the definition of dependant varies between schemes and can cause undue and unfulfilled expectation that benefits may be paid to one or more persons who fall outside the definition used by a particular scheme. I hope to identify the main differences and highlight the financial planning issues arising from each definition.

In final-salary pension schemes there will almost invariably be provision for a pension to be payable to a surviving spouse of a deceased scheme member, whether that member dies before or after retirement. There will also usually be provision for further pension benefits to be paid to any dependant children of the deceased member, though these pensions will frequently be at a lower level than that payable to the spouse.

The main issue here is whether the pension may be payable, on the death of amember, to his or her com-mon-law spouse or, indeed, to a same-sex partner.

These generous provis-ions for spouses and dependent children are not so frequently found in occupational money-purchase schemes nor, it could be argued, in personal pensions (although certainly in the latter case the full value of the deceased&#39s fund becomes payable as a tax-free lump-sum benefit).

However, in all cases (except unfunded schemes, and within flexible annuity arrangements before age 75) the money-purchase fund must be used to buy an annuity at retirement which may or may not include provision for all or part of the member&#39s pension to continue to be paid to a spouse (usually) or other dependant (less frequently).

Here again, it is vital toidentify the definition of spouse or dependant used by the annuity provider.

Legally marriedspouses – married at what point in time?

On the face of it, there should be little argument as to the legitimacy of a claim by a legally married spouse to be paid benefits from a pension scheme, which makes provision for payment of a surviving spouse&#39s pension.

However, an often overlooked issue is the identifi-cation of the deceased mem-ber&#39s spouse on a date specified by the scheme.

In particular, it must be identified whether scheme benefits are to be paid to the member&#39s spouse at date of retirement or to his spouse at the date of his death. Take the following example:

Joe was a member of a generous final-salary scheme which has, since his retirement eight years ago, been paying him a pension of £12,000 each year. There is provision within the scheme for a surviving spouse&#39s pension to be paid on his death, equal to two-thirds of the pension payable to Joe (£8,000 each year).

At the time of his retirement, Joe was married to Marie, but the couple divorced five years ago. Joe has subsequently married Janet. Joe unfortunately died last month. Does Marie receive the spouse&#39s pension or does Janet get the pension?

The answer depends on whether the scheme defines spouse as the spouse at date of retirement (in which case, of course, Marie would receive the pension) or the spouse at date of death (Janet).

For “early leavers”, member leaving employment and active membership of the scheme before normal retirement age, a “spouse at dateof retirement” definition will usually translate to “spouse at date of leaving”, and similar considerations will apply as with members remaining in employment up to normal retirement age.

Providers of pension annuities – primarily for money-purchase schemes – invariably offer purchasers the option of having the pension ceasing on the death of the member, or continuing thereafter, in full or part, to a nominated second life – usually, of course, a spouse.

If such continuation is sel-ected at the outset, a lowerpension is payable to the scheme member as the provider may anticipate the like-

lihood of having to continue pension payments beyond the death of the member.

Commonly known as “joint-life pensions” (a misnomer, it may be noted) it is, for similar reasons to those outlined for final-salary schemes, important for an adviser and his client to identify whether a surviving spouse&#39s pension, if selected, would be paid to the spouse at date of retirement, that is, the date of annuity purchase, or to the spouse (if any) at date of death.

Legally married spouses – still living together?

A number of final-salary schemes – although it is tho-ught much less commonlyin annuities bought from insurance company providers – provide for a surviving spouse&#39s pension (whether deemed to be spouse at date of retirement or spouse at date of death) to be payable only to a spouse who is still living as husband and wife with the scheme member at the date of his death.

Developing the example of Joe, Marie his first wife and Janet his second wife, if Joe and Janet were no longer living together at the date of his death, though remaining married, a scheme paying a pension to a surviving spouse (whether as at date of retirement or as at date of death) would make payments to neither Marie nor Janet if they have adopted the “living together” clause.

Definition of (legallymarried) spouse -financial planningimplications

It is clearly important for a financial adviser to determine the definition of spouse for members of occupational pension schemes in determining which spouse — that at retirement, or at death – would be paid a pension, and whether the “living together” condition has been adopted.

The “spouse” unable to expect such a pension would be well advised to make alternative financial provision against the death of his or her spouse.

It is equally important for advisers of “bought” pension annuities from insurance company providers to ensure that the definition of spouse, at death or at retirement, matches the circumstances, requirements, and perception of the parties involved.

There is relatively very little difference in rates (about 1 per cent or less) where an insurance company offers a choice of “at retirement” or “at death” definitions, the latter offering slightly less favourable rates as the underwriter assumes that remarriage, if it occurs at all, will take place with a younger partner.

As regards “early leavers” from final-salary pension schemes, it is usually the case that the transfer value offered by the scheme represents in part (often around 25 per cent ofthe total value) the value ofthe promise of a spouse&#39s pension even though the defini-tion of spouse/dependant used by the scheme would appearto preclude any such benefit (for example, the memberis not married).

In these circumstances, we would suggest, the benefits of a transfer to a private pension arrangement, under which the client can in effect select his preferred definition, may be heightened. Overall, financial advisers must check the definition of spouse in all cases and must ensure they bring this to the attention of their clients.

Keith Popplewell is managing director of Professional Briefing

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