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Blog: Living together? You need to be financially savvy

Cherry Reynard
Written By:
Cherry Reynard

With increased cohabitation growing, a massive financial planning gap is emerging. Fidelity’s Maike Currie explores how to tackle it.

Other than being the ‘bluest month’ of the year, January, also has the dubious honour of being dubbed ‘divorce month’. Monday just passed – the first working day for many after Christmas – is officially the busiest day for divorce lawyers.

It seems the ‘stress’ of the Christmas period – and the consequence of spending more time together, ends up being a make or break time for many couples. Making the right financial planning decisions is important if you’re facing a split. But, it is equally important to make the right financial planning steps if you’re living together or ‘co-habiting’.

Many people today choose to live together rather than tie the knot. But even without marrying or forming a civil partnership, we tie ourselves to the fortunes of our partners. With increased cohabitation growing, a massive financial planning gap is emerging.

Often couples are under the misconception that if they have lived with their partner for a couple of years, they have the same rights as married couples. This isn’t true. In fact, you have very little rights and should you choose to ‘uncouple’, you are not necessarily entitled to a slice of the assets, you currently share.

So what do couples living together need to think about?

1.) Draw up a will. In October 2014 the rules of intestacy which govern the way estates are divided when someone dies changed. Rule changes include the fact that widowed spouses will inherit a larger share at the expense of the claims of any children. However, long-term partners are still left out in the cold, with no entitlement where there is no will, even if they have been living with the deceased for decades or have parented children.

2.) Think about setting up a cohabitation or living together agreement. These are becoming more and more common. This will set out the way your assets should be divided if you split up. While this might seem a bit extreme if you have just moved in together – remember that it is always better to make an agreement when you are starting out rather than in the bitterness of separation.

3.) Don’t forget about the pension pot. While pension rules have improved markedly, recognising cohabiting partners alongside spouses and civil partners, you need to read the small print of your pension scheme – there may be certain conditions that need to be met to ensure your partner inherits your pension on death.

Remember to name your partner as the person you choose to benefit from your pension policy in the event of your death. Good news is that the pension death tax rules are changing. From April 2015, your partner can inherit your pension fund without facing punitive tax charges.

4.) Tax planning. It has been said that the best tax planning strategy you can have is to get married. Married couples and civil partners benefit from various tax exemptions. One of the biggest advantages is inheritance tax. Married couples and civil partners are also allowed to pass assets to each other without having to pay this tax, regardless of how much they pass on.

If you have tied the knot you also enjoy tax exemptions for capital gains tax.

There’s very little unmarried or uncivil partners can do to avoid these taxes altogether, although there are ways of arranging your assets to make your tax liability less. For example, you could cut your overall tax bill by distributing your wealth more evenly between the two of you, ensuring your personal allowances are used up and tax is paid at the lowest possible marginal rate. This is done by gifting assets to the party paying tax at a lower rate. There is a caveat though. You may be creating a liability for inheritance tax – if you pass away within seven years of the gift it will still fall within your estate for tax purposes.

Another recent benefit unmarried couples will be missing out on is sharing their ISA savings. The Chancellor recently announced that the ISA allowance can be passed between married couples on death. This means the surviving spouse retains the benefit of the savings in the ISA held by the deceased, giving them the benefit of the additional allowance regardless of whether they are the beneficiary or not.