New legislation could mean pensions windfall for cohabiting couples

10th February 2018

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 or widowers in occupational pension schemes would be recognised as civil partners under the legislation; the same tax allowances given to marries couples or civil partners; bereavment benefits for those of working age; and passing their wealth to a surviving partner, avoiding Inheritance Tax.

Especially important is the effect the legislation could have on cohabiting pensioners - 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”



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