24 May 2017

Could living together in later life seriously damage your wealth?

5 min read

Helen Morrissey, Personal Finance Specialist
Helen Morrissey

Corporate PR Specialist – Long Term Savings


People over pension age are the fastest growing group of cohabitees according to new analysis by Royal London. 

But the financial sting in the tail is that many may be missing out on tax breaks and state pension rights which are only available to those who are legally married.   Full details are in the new Royal London Policy Paper ‘Could living together in later life seriously damage your wealth?’

Data for England and Wales for the period 2002-2015 shows that the proportion of adults who were cohabiting rose by about one third over the period from 7.5% to 10%. But the proportion of people over state pension age who were cohabiting *tripled* over the same period. The rate for those aged 65-69 rose from 1.5% to 4.5%, and the rate for those aged 70 and over rose from 0.7% to 2.3%, as shown:

Over 300,000 people aged over 65 are living together as part of an unmarried couple. Strikingly, the vast majority of these have previously been married but the marriage ended in divorce or in widowhood and they have chosen not to marry again.

Despite this growing social trend, the tax and benefits system is still largely based around the assumption that the world is divided into two sorts of people: single people living alone or married people living together. Many tax and benefit rules do not recognise cohabitation and thereby treat cohabiting couples as second class citizens. The report highlights three areas of particular relevance to older cohabiting couples:

  • Inheritance tax (IHT) – members of married couples enjoy significant inheritance tax benefits over their cohabiting counterparts. They can pass their wealth to the 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 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%, 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; and 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 £50 million;
  • 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; 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.

Commenting on these findings, Helen Morrissey, Personal Finance Specialist at Royal London said:

With each passing year more and more people are choosing to live together as couples, and it is amongst those over pension age where the growth has been the most dramatic. But individuals need to be aware that there are many tax breaks and state pension advantages which apply only to married couples. For example, the family of a cohabiting couple could face an extra £70,000 inheritance tax bill compared with the heirs of a married couple. Similarly, cohabiting couples are excluded from income tax breaks worth hundreds of pounds a year and from the rights to inherit a state pension when one partner dies.

“We hope that this research will help those who are living together as couples to gain a better understanding of their financial position. But we also want the government to review whether the tax and benefit system needs to be updated to reflect the world in which we now live, not the world of the 1940s.

- ENDS -

Notes to editors:

Royal London Policy Paper 14: ‘Could living together in later life seriously damage your wealth?’ is available at www.royallondon.com/policy-papers .   An earlier paper setting out the cost to working age cohabiting couples of being excluded from bereavement entitled ‘The living-together penalty’ is also available here.

For further information please contact:

Helen Morrissey, Corporate PR Specialist – Long Term Savings

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.