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Warning! This little-known State Pension rule change could halve your retirement income overnight

Despite its limitations, the State Pension still forms the bedrock of most people’s retirement planning. The first problem is, it only pays £8,767.20 a year, which is barely a third of the average full-time salary.

Beware falling income

There’s another problem. If you’re in a couple and your partner dies, their State Pension now dies with them. If you rely entirely on the State Pension, this could immediately slash your household income by half, according to a new warning from insurer Royal London.

It wasn’t always this way. Some bereaved spouses could claim an enhanced pension based on their partner’s National Insurance record. But this entitlement was swept away when the new State Pension was introduced in April 2016.

Married couples who retire after that date no longer inherit a State Pension when their spouse dies, so the survivor’s household income could plummet. Women are hardest hit, because they typically have fewer company pensions or other savings in their own name.

Single life annuity trap

They will be hit even harder if their husband bought a single life annuity which stops paying out when he dies. A joint life annuity pays a lower starting income but will continue to give a bereaved spouse 50% of that for life.

It’s all horribly complex. But if you are worried, it’s worth checking whether you will inherit your partner’s company and personal pensions should they die.

There is one more thing you can do. Reduce your reliance on the State Pension by saving for the future under your own name.

Get saving now!

If you have access to a company pension, resist the temptation to opt out. Then top it up by saving in a company pension, or Stocks and Shares ISA.

The ISA option is so attractive because it allows you to invest in pretty much any stock or fund you wish, and then take all your returns free of income tax and capital gains tax.

If you don’t know where to start, you could sign up to a low-cost online investment platform which allows you buy shares from just £25 a month, or lump sums of as little as £100.

Once you have done that, you need to start building a balanced portfolio with exposure to a mix of UK shares and funds, and global investments as well.

Start investing today

Perhaps the simplest way to start is to buy a low-cost exchange traded fund (ETF), such as the iShares Core FTSE 100 UCITS ETF, which simply tracks the performance of the UK benchmark index of top 100 stocks, with a tiny annual fee of just 0.07%.

You could then balance this by investing in medium-sized UK companies through another low-cost ETF, HSBC FTSE 250 UCITS ETF, which has a slightly higher ongoing charge of 0.35%.

That could give you a bedrock to your portfolio which you could then supplement with individual shares, such as oil major BP and global mining giant Rio Tinto. You might soon discover that investing can be fun, which should encourage you to put even more money away.

If you do this, the pain of bereavement won’t be made worse by that subsequent financial shock.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.