Gail Khan: What does the future hold for dependants’ pensions?

Brennan Gail-Young and Cos Brewery-2015

The change in the way that pensions are being provided now means that there is no future for dependants’ pensions.

Dependants’ pensions are a legacy feature, which is more closely associated with a bygone era of pension benefits provided under final salary schemes that included generous provisions for dependants, and escalation of pensions once in payment.

In the past, pension schemes were designed around a traditional family and working-life model comprising mainly married couples where one party worked and the other either worked part time or not at all, with little or no pension provision of their own.

In this scenario, dependants’ pensions were a key feature of retirement planning.

Historically, employees would normally have been expected to work for only a handful of employers during their working life, building up substantial pension benefits where the risk and costs for providing the pension were borne by their employers.

However, modern working, with multiple employments across a range of roles, and the evolution of family life, means that this model is now outdated. Most employees now will be members of defined contribution schemes and, upon retirement, they will take their pension savings under the flexibilities being introduced from April 2015.

Some of these individuals may choose to use their pension savings to buy an annuity to provide a guaranteed income for life. However, given the cost of annuities generally, it is unlikely that even those who purchase one in the future will choose to purchase additional features such as dependants’ pensions as part of it.

Additionally, there is no sign that annuity providers are looking to reduce their costs, despite the sharp decline of annuity purchases since the Budget announcement in 2014.

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It seems likely, therefore, that dependants’ pensions will go the way of final salary pension schemes.

Gail Khan is personnel manager at Young and Co’s Brewery