Happily unmarried: Five financial things cohabiting couples should know
Happily unmarried: Five financial things cohabiting couples should know
Today, plenty of couples live together without tying the knot or entering into a civil partnership. Usually, they don’t have all the legal rights that married couples or civil partners do. Here’s the steps cohabitees can take to keep their financial affairs in order.
Millions of couples have chosen not to opt for marriage or a civil partnership. Everyone is different and there’s not one right or wrong way to live as a couple. But some may feel that a ceremony won’t change the way they feel about one another.
What some cohabiting couples may not realise is the impact being unmarried might have on their financial circumstances in difficult times, such as a break-up or the death of a partner.
While the vast majority of families are married or are civil partners (66.8%), 18.4% are cohabiting, according to 2019 figures from the Office for National Statistics. The statistics show that 3.5 million families have cohabiting couples at the heart of them.
Cohabitation is the most common type of relationship arrangement for same-sex couples, at 51.6%.
Legal status of cohabiting couples
In law there’s no such concept as ‘common-law wife’ or ‘common-law husband’. Your rights are based on whether you’re married or in a civil partnership, not on how long you’ve lived together.
Scotland did have a cohabitation arrangement recognised in law, called “marriage by cohabitation with habit and repute”. This ended in 2006. Only ‘irregular’ marriages that began before 4 May 2006 are recognised.
If you need to prove you were in this type of cohabiting situation, you’ll need to consult a solicitor. Generally, the information in this article applies to couples in England and Wales. If you live in Scotland and need more advice, see the advice from Citizens Advice Scotland.
Given that unmarried couples don’t have the same automatic rights as married ones, it pays to be organised with your finances.
1. Draw up wills
Married couples and those in civil partnerships can inherit under the rules of intestacy if their spouse or partner dies without making a will. But if you’re simply living together, you have no automatic right to inherit your partner’s estate. The rules are slightly different in Scotland.
By making a will, you can be sure that your money will go to the people you want it to.
You have three options when drawing up a will:
- use a solicitor
- use a will writing service
- do it yourself
Using a solicitor gives you the greatest protection, particularly if your financial affairs are complex. Doing it yourself, with a template or online form, could be the riskiest option and may only be suitable if your situation is straightforward.
2. Get a cohabitation agreement.
This is a legal document that sets out exactly what assets each person is bringing to the relationship, and how they should be divided if it breaks down. It should cover things like your home and its contents, personal belongings, savings and so on. Also, it can set out how much someone has contributed to the mortgage deposit and repayments.
Cohabitees have no legal rights to remain in a property or to take a share of any assets not owned by them, should they separate. Drawing up a cohabitation agreement lets each partner understand what will happen if they split up.
This can be especially helpful if the property is owned by one person, but the other has helped pay the mortgage. It could help ensure that you have a right to a share of the home, should you split up.
The agreement can also cover things like responsibility for bills, joint credit cards and bank accounts. You can even use it to set out how you’ll support your children.
Costs for having a cohabitation agreement drawn up by a solicitor range from around £1,000-£3,000. It may be worth it, depending on the value of the property. Couples may also want to make sure that both partners get independent advice, so it might be sensible for one partner to get the agreement reviewed by a different solicitor.
The charity Advice Now has a template you can use to create your own version of a Living Together Agreement. The booklet, which can be downloaded for a fee, has a lot of guidance to help you discuss what you want to happen.
Cohabitation agreements could be especially helpful if you split up. That’s because you should both know where you stand with your financial arrangements - possibly reducing the potential for arguments.
3. Think about your tax position
Make sure you understand the differences between what would apply to a married couple or civil partners, and your situation as cohabitees. For example, if you’re married, assets left to a spouse are automatically exempt from Inheritance Tax, and unused Inheritance Tax allowances can be passed on to the surviving spouse or civil partner.
Savings and investments can also be freely moved between spouses without the risk of Capital Gains Tax or Inheritance Tax.
If you’re cohabiting, you may want to take tax advice to ensure that you manage your financial affairs in the most tax efficient way. That could be helpful if you want to transfer assets between you.
The Marriage Tax Allowance applies when one partner in a married couple or civil partnership is a basic 20% rate taxpayer and the other a non-taxpayer. For example, you or your partner might be a stay-at-home parent or earning less than £12,500 a year.
The non-taxpayer can ask to have 10% (£1,250 for the tax year 2019-2020) of their tax-free allowance moved to the taxpayer. That means £1,250 of income they would have been taxed on at 20% is now tax-free – a £250 gain. However, this option is not available to cohabiting couples.
4. Check your pension situation
If you’ve paid into pension schemes, you need to check whether they’ll pay out to an unmarried partner in the event of death.
The provisions of occupational and personal pensions for dependants of a pension scheme member will depend on the rules of the scheme. Most schemes offer benefits to dependent children and some will offer benefits to a dependent partner. The scheme administrator should be able to tell you what the situation is.
You may have to complete an expression of wishes form to assign your pension to your partner, to make it clear where you want your benefits to go after your death.
Unmarried couples are not entitled to receive the state pension for deceased partners.
5. Make sure you have adequate life insurance
The rules that apply to married couples and civil partners when their partner dies, don’t apply to unmarried couples.
For example, unmarried couples are not entitled to receive Bereavement Support Payment for deceased partners. If you’re living together, you’ll need to understand what this means for you.
You may need to put a safety net in place, so you can cope financially at a time of bereavement – particularly if you have children. Bills like the mortgage or rent, gas and electricity will still need to be paid when you may have only one income.
If your partner dies, you may need to stop work or cut back. If you’re a non-working parent who has lost their partner, you may not be in a position to find work to replace their income.
Life insurance could help. If you take out a life insurance policy naming your partner as the beneficiary, they could be paid out on your death, providing a safety net to allow them to cope financially.
Find out about the different types of life insurance available, to see which one could be best suited to your needs.
You may also want to consider the pros and cons of Joint Life Insurance.
If you’re sure how much life insurance you might need, try our life insurance calculator.
Also, if your employer offers death-in-service benefits, make sure your partner is named as the beneficiary.
Knowing exactly what your financial situation would be, allows you to plan to make your financial future more secure.