Pension advice for same-sex or co-habiting couples

Understanding the law on cohabitation and civil partnerships and marriages is helpful when dealing with couples wanting to separate and share their assets.

Legally, cohabiting, unmarried couples do not have any entitlement to financial and legal protection. As such, there is no legal obligation for one part of the couple to support the other financially on separation, although there may be children involved. 

Moreover, there is no legal way to allow for pension splitting for co-habitees. 

However, if a couple does want to come to an amicable arrangement and request some form of financial advice, it is important first for the adviser to understand the couple's legal status.

As Stephen Chilcott, chartered financial planner for Addidi Wealth, explains: "It is essential the legal status of the client is established at outset.

"There continues to be the mistaken concept of the common law recognising relationships such as co-habitees.

"This so-called common-law marriage does not exist in law, although the pension rules of a particular scheme may acknowledge the relationship.

"Knowing the legal status of a client and what the particular pension rules allow is crucial to providing accurate and relevant advice."

Figure 1: Know your limitations

It is good for advisers to have an understanding of the legislative history when considering pensions and divorce/separation, what has changed recently and what is allowed (or not allowed) by law.

• Matrimonial Causes Act 1973
• Matrimonial Causes (Northern Ireland) Order 978
• Family Law (Scotland) Act 1985
• Pensions Act 1995
• Welfare Reform and Pensions Act 1999
• Civil Partnership Act 2004
• Marriage (Same Sex Couples Act) 2013
• Pensions Act 2014
• Pension Schemes Act 2015

Currently, pension sharing orders and earmarking orders are only available to married couples and not available to cohabiting couples.

Back in 2006, the Law Commission issued proposals to change the law to allow pension sharing orders for cohabiting couples, but this has not been brought into law. 

Couples can, at the outset or during a relationship, draw up a cohabitation agreement, which will set out exactly what assets each partner is bringing to the relationship and how they should be divided in the event of the relationship breaking down, although this will not affect the pension.

There is currently a finite back-dating to this equality. This could have implications for the value of pensions under review in any divorce.Alistair McQueen

Advisers in this position of having to arrange the finances for a cohabitating couple should also advise them on reviewing existing pension scheme documentation, such as nomination/expression of interest forms.

A cohabiting partner may have originally intended all of their pension benefit for his or her partner in the event of the member's death - if this is not changed at the time of the break-up, the scheme trustees could still pay out to the former partner in the event of the member's death.

It could be judicious to advise setting up trusts or nomination forms in the children's names, so any dependents will still benefit financially, even if their parents are no longer living together.

Same-sex splitting

Before the 2004 Civil Partnership Act, same-sex partners were in the same position as unmarried heterosexual partners living together.

When the law finally afforded same-sex partners equal rights to financial and legal protection, from 5 December 2005 onwards (couples could register from 21 December 2005), this ostensibly meant equal rights in terms of pension sharing between partners.

However, it did not mean all companies amended their pension schemes to allow the full range of benefits. 

Many companies still only backdate pension payments in the event of death, for example, to 2005 - even if the couple had been partners for many years previously - posing a particular issue for survivors' pension payments on the death of a member. 

Experts FTAdviser spoke to pointed out that many occupational pension schemes imposed a prerequisite of marriage on the payment of a benefit, which effectively deprived a same-sex couple from the benefit altogether until recently.

While the 2013 Marriage (Same-Sex couples) Act removed this obstacle, not all schemes have removed what could be seen as unfair practices.

In the case of civil partnerships and same-sex marriages, it will be important to consider what benefits could be available from the scheme when the pension rights are being valued at the time of divorce.Mike Morrison 

Where an occupational scheme provides survivors’ benefits to married couples, it must also provide them to surviving civil partners - but only in respect of service from 5 December 2005.

This means any payment of pension to an employee’s same-sex partner on death can only be calculated based on 10 years of pensionable service, regardless of whether the employee has accrued 20 or even 30 years’ worth of pensionable service.

As Alistair McQueen, savings and retirement manager for Aviva, explains: "In the eyes of the law, same-sex couples should be treated the same as other couples when it comes to divorce, but there is currently a finite back-dating to this equality.

"This could have implications for the value of pensions under review in any divorce. This issue has been challenged in the Supreme Court [Walker versus Innospec] and we await final judgement."

Case Study: Walker v Innospec

Mr Walker worked for Innospec Ltd from January 1980 until his retirement on 31 March 2003.

He was a member of Innospec’s pension scheme, which provided that if a member dies on or after 1 December 1999 leaving a surviving spouse, then that spouse will receive a pension for life.

At the date of his retirement Mr Walker had been living with his male partner since September 1993.

The Framework Directive established a framework for combating discrimination, including sexual orientation.

The UK was required to transpose that directive into domestic law by 2 December 2003 but the Civil Partnership Act 2004 came into force on 5 December 2005.

Mr Walker and his partner registered a civil partnership on 23 January 2006 and they have since married.

Innospec informed Mr Walker that, for the purposes of the surviving spouse’s pension, he and his partner would only be treated as a married couple from 5 December 2005.

Mr Walker brought a claim in the Employment Tribunal against Innospec alleging discrimination.

The Employment Tribunal decided in his favour but on appeal, the Employment Appeal Tribunal (EAT) reversed that decision and the Court of Appeal upheld the decision of the EAT.

Mr Walker has now appealed to the Supreme Court. At the time this guide was produced, a hearing was scheduled for March 2017.

Options for advisers

Mike Morrison, head of platform technical at AJ Bell, comments: "In the case of civil partnerships and same-sex marriages, it will be important to consider what benefits could be available from the scheme when the pension rights are being valued at the time of divorce."

One option for advisers whose clients wish to avoid the backdating issue is to transfer the pension into a personal pension, where appropriate, where control of death benefits can be regained, and this could help with a more equitable division of assets should the couple divorce.

However, this could prove difficult, especially if the pension in question is a defined benefit pension with guarantees.

This is where a financial adviser comes into his or her own, says Linda Todd, head of operations for Bankhall.

She says: "An adviser with the right knowledge can be an asset to the client because of the potential confusion around the various pieces of legislation introduced to avoid discrimination and how schemes have adapted to accommodate this.

"Therein lies a problem for schemes and members alike and the need for advisers to understand why inconsistencies may exist due to some elements of the legislation not taking effect retrospectively.

"Advisers with the appropriate knowledge will be in the unique position to understand when their client is being discriminated against by the scheme and to elicit appropriate benefits for their partner."

simoney.kyriakou@ft.com