I’m fearful about shedding annuity earnings if my husband dies earlier than me

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

They were taken out on retirement and the forms were filled in by a person we knew working for a financial services company locally.

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

I called HMRC which tried to trace the company. They are no longer in operation and the financial adviser is deceased.

My husband is now diagnosed with dementia and I am going to lose the pensions if he should pass away. Can these annuities be cashed in? My husband is 79 and I am 77.

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Steve Webb replies: Although sales of annuities to people at retirement have slumped in recent years, there are still millions of older people receiving income from those bought years ago.

Unfortunately, as in your case, for the large majority of these annuities payments will cease when the policy holder dies and there will be nothing for their surviving spouse.

The basic idea of an annuity is that you hand over your pension pot to an insurance company and in return it promises to pay a guaranteed income as long as you live.

In the past, the vast majority of annuity sales were not much more complicated than that.

More recently however there has been a growing focus on shaping annuities in a way which best fits your retirement needs.

This could be making provision for a surviving spouse or partner (‘joint life’ annuities), building in protection against inflation (‘escalating’ annuities) or setting up an annuity that only pays out for a set period of time (‘fixed term’ annuities) – perhaps to bridge the gap between when you want to stop work and when your other pensions start to be payable.

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

When you go to an insurance company with your pot of money, it will give you a range of annuity quotations (as well as flagging rates on offer from other providers).

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

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

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

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

In your case there may have been a financial adviser involved. If so, they should have certainly talked your husband through his options, including getting him to think about what would happen if he died first.

In terms of getting redress for potential mis-selling at this stage, I’m afraid there’s little that can be done. In part this is because the firm in question and the adviser are no longer around.

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

Although you have potentially lost out by the absence of a spouse’s pension, he has gained for the last 19 years by choosing the higher starting pension, so the original decision was not necessarily a bad one to take.

You ask about the potential for ‘cashing out’ these annuities but I’m afraid that is not an option. 

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

In rare cases, insurers may cash out very small annuities but this is very much the exception and they cannot be forced to do so.

For those currently in receipt of an annuity it is well worth checking whether there would be a spouse’s pension or not.

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

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

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

For couples who come under the new state pension system there is little or no inheritance of state pension rights when one spouse dies, so there can be a slump in household income at this point.

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

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