Cohabiting couples: Don’t get caught out

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If you're unmarried, make sure you're not left out in the cold (Source: Getty)

As fewer couples choose to tie the knot, it’s clear that marriage is no longer widely seen as the be-all-and-end-all to a relationship.

Instead, many couples are opting for the “cohabitation” route – as sexy as that sounds.

Figures from insurance giant Zurich estimate that there are more than 400,000 cohabiting families in London alone. But unfortunately, many financial rules are geared towards the legalities of marriage, meaning cohabitees can end up being financially left out in the cold.

Putting the right financial plan in place is – if anything – more important for cohabitees, warns Zurich’s Peter Hamilton. So if you have no plans to tie the knot, there are several things you and your partner should consider to make sure you don’t suffer financially.

Agree in case you disagree

It’s worth drawing up a cohabitation agreement which sets out what each partner has contributed to the household finances, and how assets would be divided if you decide to separate.

This is particularly important if you live in a property that your partner owns and you contribute to the mortgage payments – because without an agreement, you might have no right to your share of the property if the relationship breaks down.

Til death do us part

Hamilton says it’s important not to ditch income protection along with the marriage ceremony.

Figures from Zurich indicate that 87 per cent of unmarried couples who live together in London don’t have some form of life insurance cover – which is the sum of money paid out after death, or if someone becomes too ill or injured to work.

Hamilton says it can be all too easy to overlook life insurance without the legal “nudges” that come hand in hand with getting married. “It’s the point at which a couple assess their partnership in a long term, practical way and begin to consider wealth management and legacy planning,” he says.

“If the unthinkable were to happen to the main breadwinner in the family, the emotional strain this brings would be made all the more challenging if there is no legal document directing cover to the intended beneficiaries.”

But even if you’re not the breadwinner, life insurance ensures something is left behind to cover any lasting debts and funeral costs.

Pension pitfalls

If you’re married, you can claim a state pension based on your spouse’s national insurance (NI) record and inherit part of their state pension when they die.

But former pensions minister Steve Webb points out that the NI system is based around legal marriage rather than cohabitation, meaning unmarried couples are not entitled to their partner’s state pension if they die.

Webb, who is now policy director at Royal London, also points out that means-tested benefits, such as pension credit, are affected by the income of the whole household.

This means that if someone moves in with you, your means-tested benefits are likely to go down, even if they are not married to you.

With company schemes, you will often be asked to specify who you want to receive any pension or lump sum if you die.

While this process is relatively straightforward for married couples, some schemes have special rules for cohabitees, such as a requirement that you have lived together for a minimum period of time.

Webb says it’s well worth contacting the provider of your scheme to find out where you stand.

Be will-ing to prepare for the worst

Just because you haven’t formally promised to stay together until you die, doesn’t mean you won’t.

But if you cohabit, you don’t automatically inherit your partner’s estate if your partner passes away, making it even more imperative that you have wills in place.

Without a will, the estate will be subject to the rules of intestacy, which determine how the deceased’s assets are divided.

It’s also wise to make sure you both discuss what’s in your will and know where they are kept, so that your and your partner’s wishes are carried out in the way you’d like.

Watch out for the tax trap

Usually you won’t have to pay inheritance tax (IHT) if the value of your estate is below the £325,000 threshold.

But while married couples (or those in civil partnerships) can merge their tax-free allowances so that the surviving spouse doesn’t have to foot a huge IHT bill, this isn’t the case for those who haven’t tied the knot.

Unmarried couples need to be careful with this tax position and make sure they have wills in place, says Keith Churchouse, director of advice firm Chapters Financial.

A will won’t make you immune from IHT, but it will reduce the risk of assets being taxed twice by becoming part of the surviving partner’s estate.

Churchouse says: “if you have any doubts, get some advice from a legal professional – there’s no such thing as a ‘common law’ marriage.”

There are various ways you can mitigate against IHT by distributing the estate for tax purposes, but it usually requires careful tax planning with the help of a financial adviser.

It’s sensible to have a mutual financial plan in place, using both income tax personal allowances and basic rate tax bands, says Churchouse.

“These allowances have the potential to increase household income if shared correctly.”

No surprises

The financial adviser also says couples should keep their eyes peeled to this year’s Budget on 22 November to make sure they are aware of tax changes that might emerge. “There are always plenty of examples of how households can be affected positively or negatively, so check your position carefully.”

Of course, all the rules are subject to change, particularly as the Cohabitation Rights Bill is currently being debated in parliament.

But if you’re a cohabiting couple and you don’t want to get hitched, just make sure you take the necessary steps to ensure protection is there if it’s ever needed.

At the very least, it should bring you both peace of mind.