Cohabiting couples risk financial disaster

Happy Valentine’s Day: unmarried couples believe they have more rights than they do. And that’s not the only financial penalty they face

Assumption is the enemy of financial security (Getty)

Millions of cohabiting couples mistakenly believe that they would automatically receive their partner’s money, property and pension if they died.

The assumption is putting the financial security of a huge number of Britons at risk, exposing them to financial devastation at a time when they are also grieving their partner.

New research from Direct Line Life Insurance shows that more than a third of cohabiting couples don’t understand their legal rights in the event their partner passed away. In fact, one in 10 believes they would automatically inherit their partner’s share of the property, even though that’s only actually the case when there’s a will that specifically states that.

Worryingly, just 26 per cent of cohabiting partners have a will, compared with 52 per cent of married couples, leaving them at real risk. And less than a third of cohabiting couples have life insurance, again, putting their stability at risk at a time when they would be grief-stricken and acutely vulnerable to the additional distress caused by financial turmoil.

Jane Morgan, business manager of Direct Line Life Insurance, says: “As our society changes, marriage is further down the agenda for many couples. It is very common for partners to live together for extended periods of time before getting married, if they marry at all.

“However, the law is still somewhat behind the times in regards to cohabiting partners and worryingly, millions of Brits are under the false impression that they have the same legal and financial security as married couples.”

The law is definitely failing to keep up with this one. Cohabiting is fast becoming the new normal and yet financial and legal protections have fallen way behind.

Rising numbers

Official figures show that cohabiting couples are the fastest-growing family type in the UK, with 3.3 million families living together without being married or civil-partnered last year.

There is a Cohabitation Rights Bill currently passing through parliament, which should provide extra protections for people who live together. However, that’s still in the early stages and it’s unlikely to be resolved until next year.

In the meantime, cohabiting couples don’t just have fewer rights than married couples, they also have fewer state financial protections.

They do not qualify for bereavement benefits on their partner’s death and their children will not benefit from their remaining parent receiving widowed parent’s allowance. That’s a situation that has been criticised by numerous campaign groups.

“The higher rate of bereavement benefit currently paid to those with children is in recognition of the emotional, practical and financial costs of bringing up children when a partner has died,” says the Childhood Bereavement Network in a statement.

“Children themselves have no influence over whether their parents are married or not, so it seems harsh to deprive some of financial support following a parent’s death based on their parents’ marital status.”

Some commentators have suggested that if unmarried opposite-sex couples were allowed to enter civil partnerships rather than marriages then it might encourage them to do so, meaning they would gain the extra protections and rights.

Helen Morrissey, personal finance specialist at pensions and investment company Royal London, says: “With each passing year more and more people are choosing to live together as a couple without marrying, yet we still have a tax and benefit system which barely recognises their existence.

“It cannot be right that they pay the same tax and national insurance contributions into the system as their married counterparts but are entitled to get less out of it. The ability to register a civil partnership would give the authorities no excuse not to recognise this large and growing group.”

Financial penalty

It’s not just if a partner dies that cohabiting couples face a financial penalty. Research from Hargreaves Lansdown shows that getting married, and staying married, can provide a pretty substantial bonus.

Sarah Coles, personal finance analyst at the investment firm, explains: “The numerous tax benefits available to married couples means that even in cold financial terms, it may pay to tie the knot. In fact, over a 50-year marriage, even after the cost of the wedding, in today’s money, the couple could be £190,964 better off.”

The most obvious benefit is the marriage allowance, a small but constant perk specifically designed to reward marriage over cohabitation. It allows a partner who doesn’t use their full personal tax-free allowance to transfer a chunk of it to their taxpaying partner – up to £1,150 in the current tax year. That means a potential saving of up to £230 a year.

Married couples can also share assets between them and take advantage of both personal tax allowances, personal savings allowances and dividend allowances. They can reduce their capital gains tax liability on assets held jointly by combining their gains allowance.

On top of that, married couples can inherit their spouse’s ISA investments, without losing the tax-break on their cash. They benefit from defined benefit pension death benefits, meaning they typically gain 50 per cent of a deceased spouse’s pension.

Perhaps the biggest break for married couples comes from inheritance tax. A married partner can leave everything to their surviving spouse with no tax to pay, whereas unmarried couples would benefit from the normal allowances, but after that they are likely to pay 40 per cent tax.

What’s more, within a marriage the surviving spouse can also inherit their partner’s inheritance tax allowance, meaning they can leave £650,000-worth of cash and potentially £350,000-worth of property to their heirs tax-free.

That’s a massive benefit and it is not available to unmarried couples.

Conscious choices

Some cohabiting couples will be saving to marry. Some will not yet be ready for that next step. Others will have made a conscious choice not to get married at all.

Yet all those couples and any children living in those families face a state-sanctioned financial penalty, compounded by their increased likelihood of having failed to plan for the possible death of a partner.

No one wants to imagine that kind of future and most people are guilty of choosing not to consider the chances of painful events. Yet both child-free cohabiting couples and parents alike need to provide themselves with financial protections so they don’t risk losing their partner and their financial security in one blow.

The Childhood Bereavement Network estimates that in 2015 alone about 23,600 parents died leaving dependent children. That’s one parent every 22 minutes and 112 newly bereaved children each day. With numbers like that, no parent can afford to ignore their financial stability in the event of the death of their partner.

No one should feel forced into marriage to protect their partner and their family. However, by drawing up a proper will, taking out life insurance and having a better understanding their rights should one of them die, cohabiters can reduce the risks they face.