Spiralling numbers of co-habiting pensioners told to get hitched or else miss out financially

Oliver Gill
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The number of unmarried pensioners shacking up has tripled in just over a decade, denying them a raft of pensions and other benefits afforded to married retirees.

The proportion of 65 to 69-year-olds co-habiting leapt from 1.5 per cent to 4.5 per cent between 2002 and 2015. This trend was more marked for the over-70s: rising from 0.7 per cent to 2.3 per cent, according to data prepared by life and pensions firm Royal London.

More than 300,000 over-65s have moved in together but decided not to marry. The vast majority of these have previously been married, but decided not to take the plunge again.

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And such a decision could be hitting them in the pocket as many tax and benefit rules do not recognise co-habitation in the same way as marriage.

"Individuals need to be aware that there are many tax breaks and state pension advantages which apply only to married couples," said Royal London personal finance specialist Helen Morrissey.

She added:

The family of a cohabiting couple could face an extra £70,000 inheritance tax bill compared with the heirs of a married couple.

Co-habiting couples are also excluded from income tax breaks "worth hundreds of pounds a year", said Morrissey. In addition, married spouses are entitled to inherit a state pension when one partner dies.

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Royal London, a mutual society charting its history back to the 19th Century, urged the government to review the tax and benefit system. Morrissey said the rules "should be updated to reflect the world in which we now live, not the world of the 1940s”.

What could co-habiting pensioners be missing out on?

Inheritance tax (IHT)

  • ​Married couples can pass their wealth to the surviving spouse free of inheritance tax
  • They can also transfer any unused portion of their inheritance tax threshold to their spouse.
  • Married couples can also transfer any unused portion of the new residential nil rate band, designed to help families pass their home to direct descendants in a tax efficient manner, to one another on death. When the residential nil rate band is fully in force in 2020 it will be worth up to £350,000 to the surviving spouse in a married couple. The surviving cohabiting partner only has their £175,000 residential nil rate band. Based on an IHT rate of 40 per cent, being excluded from this scheme puts cohabiting couples at a £70,000 disadvantage.

Income tax

There are two special tax allowances for married couples only:

  • The old Married Couples Allowance applies only to the oldest married couples and is worth up to £844 per year.
  • A new Marriage Allowance introduced in April 2015 and is worth £230 per year in 2017/18. A cohabiting couple who missed out on the Marriage Allowance in each of the three years since it was introduced would lose a total of £662; if an estimated 75,000 taxpaying cohabiting couples have missed out to this level, the total loss would be around £50m.

State pension

  • Most of today’s pensioners reached pension age before 6th April 2016 under the old state pension system.
  • Under the old system, there were extensive rights to derive an improved state pension following the death of a spouse. These rights do not apply to cohabiting couples; an older married woman could easily see her state pension boosted by around £2,500 per year following the death of her husband, but a cohabiting partner would miss out.

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