Pension pain ahead for unmarried couples

Many people have ‘common-law marriages’ but the name, while sounding formal, is a mere convention; it is not given any of the legal status of marriage.

The Citizens Advice Bureau suggests partners can formalise aspects of status with a partner by drawing up a legal agreement called a cohabitation contract or living together agreement, but this can only go so far.

Most public service schemes do not provide survivors’ pensions to unmarried partners, although death lump-sum benefits may be provided to unmarried partners in some schemes, where members are able to nominate them.

Indeed, living as unmarried or “unpartnershipped”, as Pinsent Mason’s Robin Ellison points out, could mean “people’s pension rights in the private sector could be badly affected”.

He explains: “Unmarried straight or unmarried gay relationships are treated as discretionary benefits. In other words, trustees look at whether there was any dependency or financial dependency, and take a view.

“They may pay or they may not.”

David Trenner, technical director for Glasgow-based Intelligent Pensions, says most defined benefit or money purchase schemes will take someone’s cohabiting relationship into account when paying out dependant’s pensions.

He says: “Most schemes will provide dependants’ pensions for someone who is financially dependent on the member or where a couple is interdependent, but this will always be at the trustees’ discretion.”

If a couple are cohabiting then there may be issues in relation to money purchase schemes on death Clare Moffat

Although English law does not recognise common-law wives, Mr Trenner adds: “There is a greater likelihood that trustees will award a dependant’s pension to a common-law spouse, particularly if there are children of the relationship.”

Statutory schemes

However, while most occupational schemes enable trustees to make discretionary payments, there are millions of people in rigid statutory schemes.

Because these schemes, in the public sector, are governed by superannuation regulations, they do not have any discretion to pay benefits not covered by statutory instruments.

Mr Trenner says: “They have less flexibility than private sector schemes, which are governed by a trust deed and rules and the regulations state what can and cannot be done under a statutory scheme.”

The NHS itself - one of the UK’s largest employers - is covered by more than 40 different sets of statutory regulations, while the Local Government Pension Scheme, which has 4.6m members, is also governed by statute.

This inflexibility could lead to problems later down the line for thousands of people who are co-habiting and relying on future pension income - so it is important for clients to be made aware of this.

Robert Graves, head of pensions technical service for Rowanmoor, says: “Members of defined benefit schemes need to check the scheme rules to see who would be entitled to receive a survivor’s pension on their death.

“If they do not adequately provide for cohabiting couples, that would be a factor to consider in transferring out to a more flexible pension arrangement, such as a self-invested personal pension.”

Income or lump-sum

But for those schemes where trustees do have discretion to pay out pension income, not just a lump-sum payment, Clare Moffat, technical manager for Prudential, says keeping paperwork up to date is vital.

She says: “If a couple are cohabiting, there may be issues in relation to money purchase schemes on death, especially if there is a separated spouse and no expression of wish form.

“A couple may have lived together for 20 years but for some reason the divorce with the original spouse never took place.

“If they have an MP scheme but have not filled in an expression of wish form with the name of their cohabitee on it, then the pension provider can only pay out a lump sum and not income payments.

“If the person who died was over 75, then tax is payable at the recipient’s marginal rate of tax, which would probably be more for taking a lump-sum than if they received income payments.

“To give the most choice in relation to death benefits, then all those whom the individual would like to receive benefits should be on the expression of wish form.”

National Insurance and inheritance

There is also an issue with national insurance, as Royal London highlighted in January 2016.

Calculations from the life and pension provider reveal cohabitating couples could be missing out on £82m a year thanks to “out-of-date benefit rules that treat cohabiting couples as second-class citizens.”

Under current rules for NI benefits, a survivor in a couple could get a £2,000 lump sum and ongoing NI bereavement benefits, which can be worth more than £10,000. However, eligibility is restricted to married couples.

According to Office for National Statistics figures, in 2014 there were 18.6m families in the UK.

Of these, 12.5m were married couple families. Cohabiting couple families grew by 29.7 per cent between 2004 and 2014.

Steve Webb, director of policy for Royal London, says: “Many umarried couples have been living together for years and are financially dependent on each other.

“Yet at a time of bereavement the benefit system treats them as though their partnership never happened, despite paying the same NI contributions into the system as everyone else.

“A benefits system that was designed in the 1940s needs to be brought up to date.”

Inheritance tax can also affect unmarried couples.

Mr Ellison adds: “In relation to IHT, co-habiting couples are simply treated as unmarried. The only remedy a partner may have is to claim as a dependent to the court for some money, which is in the discretion of the court.”