10 February 2018

Three million couples could be set for a 'multi-billion pound windfall' - Royal London

6 min read

Steve Webb
Royal London



3.3 million cohabiting couples could be set for a multi-billion pound boost as a result of legislation currently being considered by MPs, according to mutual insurer Royal London.

At present, those who are married or in same-sex civil partnership benefit from a range of tax and benefit advantages which are denied to those who are cohabiting. But if civil partnership was extended to opposite sex couples, those tax and benefit advantages could benefit a large new group and the combined gains could run into billions of pounds.

If the law to equalise civil partnerships is passed, the tax and benefits advantages to opposite sex couples that enter into a civil partnership could include:

  • Widows/Widowers in occupational pension schemes – provision for ‘survivors’ in occupational pension schemes has historically been geared around married couples and, more recently, civil partners; if millions of opposite-sex couples could register as civil partners, the gains could easily run into billions of pounds (see notes to editors for more details of this calculation);
  • Income tax – ‘Marriage Allowance’ – Since April 2015, most married couples and civil partners have been entitled to a tax allowance worth £230 per year in 2017/18. The gains if all cohabiting couples were eligible and claimed the allowance would be around £750m (3.3 million couples times £230). Even if only 1 in 3 of today’s cohabiting couples registered for a civil partnership and was eligible for the allowance, the gain would still be around £250m. 
  • Bereavement benefits for those of working age – under current rules, when one person in a cohabiting couple dies, their surviving partner is not entitled to National Insurance benefits for bereavement. In 2016, Royal London estimated that such couples were missing out on around £82 million each year as a result. If they were allowed to register a civil partnership they would come within the scope of these benefits. The Bereavement Support Payment is currently paid at two rates – a higher rate (for those with children) comprising a lump sum of £3,500 followed by a monthly payment of £350 for up to 18 months, or a lower rate of £2,500 with a monthly payment of £100 per month. 
  • Inheritance tax (IHT) – married couples and those in same sex civil partnerships can pass their wealth to a surviving spouse free of inheritance tax and they can also transfer any unused portion of their inheritance tax threshold to their spouse. Neither of these options is available to cohabiting couples. In addition, married couples and same sex civil partners can transfer any unused portion of the new residential nil rate band, designed to help families pass on their home to direct descendants without tax. Although cohabitation rates amongst the elderly are relatively low, around 1 in 40 men aged 70 or over is cohabiting, and this proportion is rising every year, suggesting the number who could benefit from this rule change could grow significantly. 
  • State pension – most of today’s pensioners reached pension age before 6th April 2016 and came 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, but 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. If the law changed, there would be a strong incentive for older cohabiting couples to register for a civil partnership in order to benefit from these provisions.

All of these estimates are based on current levels of cohabitation, but these potential gains could rise significantly over time. The number of cohabiting couples has roughly doubled in the last twenty years from around 1.7 million in 1997 to around 3.3 million in 2017, and the number continues to grow steadily.

Helen Morrissey, Personal Finance Specialist at Royal London said:

"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."

Steve Webb, Director of Policy at Royal London said:

"Millions of couples who live together could potentially benefit to the tune of several billion pounds if they were able to register a civil partnership. The biggest areas where they could gain include new rights under company pension schemes, access to income tax breaks for couples and entitlement to bereavement benefits. But some could also see large gains from inheritance tax advantages currently restricted to married couples and same sex civil partners. This reform is long overdue and would stop these couples being treated by the state as second class citizens."

- ENDS -

For further information please contact:

Royal London Press Office

Note to editors

  1. A ‘Private Member’s Bill’ being taken through the House of Commons by Conservative MP Tim Loughton would require the government to ‘prepare a report assessing how the law ought to be changed to bring about equality between same-sex couples and other couples in terms of their future ability or otherwise to form civil partnerships”. The Bill received an unopposed Second Reading on Friday 2nd February.
  2. Royal London has analysed the problems faced by cohabiting couples in two recent policy papers:
  3. It is difficult to estimate with any precision the potential impact on pension fund liabilities of allowing opposite-sex couples to register a civil partnership, however the following figures kindly supplied by Lane, Clark and Peacock give a feel for the potential order of magnitude:
    • According to the 2017 ‘Purple Book’, current liabilities for DB pension schemes are £1.7 trillion on a ‘Section 179’ basis (ie to provide PPF level benefits) and £2.3 trillion on a Section 75 basis (ie to buyout liabilities); for simplicity we therefore assume total liabilities of £2 trillion; 
    • Survey evidence gathered by LCP suggests that private sector DB liabilities in respect of those who will become widows/widowers in the future are typically around 15% of total liabilities; applying this to the £2 trillion figure gives around £300 billion; 
    • If the inclusion of opposite-sex civil partners added just 1% to the liabilities of schemes, this would be an additional bill to schemes (and gain to members) of roughly £3 billion; 
    • The 1% figure is purely illustrative. However, a standard assumption for schemes is that around 80% of members are married, and of the remaining 20% the majority will be single rather than cohabiting, particularly given the age distribution of DB scheme members. Costs will only arise where schemes do not currently make provision for cohabiting partners, and the size of any cost will depend crucially on whether eligibility starts only from the date when the new legislation was passed, whether it is backdated to when civil partnerships were first created, or further still. 
  4. The Marriage Allowance benefits married couples and civil partners where one partner is a basic rate taxpayer and the other is a non-taxpayer. The lower earner can transfer unused personal tax allowance of up to 10% of the annual rate to the higher earner. The value of this transfer is 20% of the amount transferred. At current rates, the maximum value is 20% of £1,150 or £230 per year. 
  5. See Estimates of trends in cohabitation published by the ONS.

About Royal London:

Royal London is the largest mutual life, pensions and investment company in the UK, with funds under management of £117 billion, 8.8 million policies in force and 3,745 employees. Figures quoted are as at 30 June 2018.