Pension blow for younger wives

THOUSANDS of women with much older husbands will be affected by a “trophy wives” pension loophole which could leave them tens of thousands of pounds worse off.

Cash-strapped firms are increasingly activating a clause, which until now has been rarely used, to save money by cutting benefits for deceased former workers’ much younger spouses. It could leave a widow who is 20 years younger than her late husband 25 per cent worse off for the rest of her life.

Experts said the trend was because of “black holes” in pension schemes, which meant companies were doing whatever they could to cut costs.

Earlier this week the Government launched a green paper on ways to make so-called “final salary” pensions more affordable for companies, in which it suggested people’s benefits could be watered down. So-called “young spouse’s reductions” give firms the option to reduce the income inherited by surviving spouses if there is a large age gap between the couple.

The clauses were written into many pension arrangements when they were first set up and could affect thousands who die and leave their final salary pension to a much younger spouse.

While the average gap between marriage partners has remained fairly constant, at between two and three years, ONS data shows the proportion of marriages with 10, 15 and 20-year gaps has risen substantially over the decades.

Couples with a gap of 10 years or more are being warned to check the terms of their pension schemes as they could see the benefits they are entitled to reduced by thousands of pounds.

The issue primarily concerns “final salary” schemes where the level of payments are linked to the worker’s leav- ing wage and length of service. Most schemes also pay out to a surviving partner at a lower rate when the original member dies.

But many include a clause that cuts the payment made to surviving husbands and wives by 2.5 per cent for every year between them over 10 years. For example one Daily Telegraph reader’s pension was reduced by 70 per cent because there were 38 years between her and her late husband. Because of the age gap, her pension fell from £12,000 to £3,600 per year.

Andrew Tully, from pension firm MGM Advantage, said: “These clauses were quite common with older-style pensions and could apply to a lot of people. Many of them were written so schemes could activate the rule if they were facing a funding crisis.

“Now that many of them are in difficulty they are more likely to enforce reductions than they were in the past.”