Cohabiting couples: how to protect yourselves financially
There’s an increasing trend in the UK of people living with a partner.
According to the latest figures from the Office for National Statistics (ONS), there were 3.3 million cohabiting couples in 2016.
While this family set-up is growing in popularity, it doesn’t mean you or your partner are necessarily afforded the same rights as those in the traditional family unit in the event of a break up, illness or death.
However, there are a number of points cohabiting couples should consider to ensure their financial interests are protected, as well as making provision for a surviving partner if the worst were to happen.
Here are some of the key considerations:
The provision for your partner depends on the type of pension you have, and the amount they could receive depends on whether you’ve started drawing income from the pot and the age at which you die.
When it comes to final salary or defined benefit (DB) schemes, they typically make provision for a spouse, so a married couple or civil partner is included. As such, it’s best to check the scheme to see if a cohabiting couple is covered.
Thornton Wells, senior consultant at Mattioli Woods says with DB schemes, there can be a number of quirks to the rules which pension savers need to be careful about. He says: “With DB schemes it’s unlikely that an unmarried person would get anything from the scheme, which is why many people are considering transferring out to defined contribution (DC) schemes. Under the more modern and flexible DC scheme, the pension pot isn’t lost on death and it’s up to the individual pension holder to decide who to leave the pot to.”
Under DC schemes, it’s essential for members to submit an Expression of Wish form noting down who should benefit from your pension pot.
Jamie Jenkins, head of pensions strategy at Standard Life, says the pensions flexibility allows anyone to be nominated to receive any type of pension death benefit – from a DC scheme.
“This can be in the form of a lump sum or a pension (annuity or drawdown). There doesn’t need to be any family link; it is down to the member of the pension scheme to nominate the person/people they’d like to receive benefits on their death.”
He adds that it’s critical to carry out the nomination as if someone hadn’t completed the form, DC pension providers could use their discretion to determine who to pay the amount to.
Another point of note is on the taxation of the pension pot which could alter the amount received by the surviving partner – quite a complex area.
Jenkins explains that under DB schemes, if the pension owner dies before reaching the age of 75, then pension benefits are free from income tax, provided that they are paid out or designated for drawdown within two years of death.
If the member hadn’t started claiming their pension, the amount would be tested against the deceased’s lifetime allowance (currently £1m), and a charge could apply.
For those who die after the age of 75, the amount is taxable, based on the marginal rate of tax paid by the recipient. Jenkins adds that with DC schemes, any death benefits payable before age 75 can be made tax-free, but are taxable in the hands of the recipient if the deceased was over age 75.
For cohabiting couples who want to make provision for each other, it’s essential to make a will.
If no will is made, the laws of intestacy would apply which means for unmarried couples, everything would be shared equally between the deceased’s children (if there are any), side-stepping the surviving partner.
Where there are no children, the estate would be split in the following order: surviving parents, the deceased’s siblings (or their children if the sibling has died), grandparents, aunts/uncles (or their children if they’ve died).
In the absence of any family members, the deceased’s estate would all pass to the Crown.
Sarah Hollowell, head of tax and trustee services at Killik & Co, says: “These rules don’t fit many of today’s family structures and they also don’t give any recognition to friends or to charities who the deceased might like to benefit in the event of their death.”
By writing a will, this allows the individual to dispose of their estate in the way they want, such as making provision for their partner, as well as any other family members or friends of your choosing.
Hollowell adds that the current rules surrounding not only intestacy but also the transferable property nil rate band and the ability to pass assets between spouses free of tax do not stretch to cohabiting couples.
“The most important thing is to ensure a will is in place to protect your partner should you die. Intestacy rules just don’t recognise unmarried partners. However, marriage immediately invalidates a will if you already have one in place. This highlights the fact that even after you’ve written a will, you should review your position regularly,” Hollowell says.
What happens to your property depends on how you own it with your partner: joint tenants or tenants in common. This confirms the type of legal ownership each person has over the property, setting out what happens to it in the event of the breakdown of the relationship or if one of the owners were to die.
This is the most common type of joint home ownership in the UK. It gives equal rights over the property for each partner and equal ownership with each owning 100% of the property.
As a result, for joint tenants the ownership of property passes automatically to the other owner when one dies. The share of the property can’t be passed onto a third party in a will while the other owner is alive.
Tenants in common
With tenants in common each owner has a fixed stake in the property – which could be 50/50, but doesn’t need to be. It’s common for partners to enter into this legal agreement where one partner puts down a larger deposit when purchasing a home, making it possible for two people to jointly own a home together, with one person owning say 70% and the other owning 30% of the property.
In this case, if the relationship breaks down between the two homeowners, the financial split may be easier to resolve because the share of property ownership has already been agreed upon, even if the property has increased in value.
While the surviving partner may be protected in this way, Wells says they may not always be able to afford taking on a full mortgage, plus bills, council tax etc, particularly if they’re not a pension benefit recipient.
“First and foremost co-habitees should think about life cover so that if one of the partner dies, the surviving partner would receive a lump sum to clear all or part of the mortgage. Critical illness and income protection should also be considered as you’re more likely to have an accident or illness rather than dying,” he says.
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He adds that while no one wants to talk about death, illness or break-ups, it’s important to be open with one another to ensure you know what the financial situation may be if the worst were to happen.
What about Cohabitation Agreements?
Cohabitation Agreements help partners establish precisely the assets each party holds in a relationship and how they should be divided in the event of the relationship ending. It can appeal to those where one partner has bought their own property and the other partner moves in, where they could contribute to bills and rent. It can be seen as a ‘pre-nup’ of sorts but they are expensive, coming in at £1,000+ for a professional to draft.
However, Hollowell says: “Cohabitation agreements certainly don’t offer the protection of a will. A will really is the only option for unmarried partners to ensure that in the event of one of them dying, the other receives a proportion (or all of) their estate. Of course, if a cohabiting couple own property in joint names (as joint tenants) and one dies, their share goes into the name of the surviving partner.”