In the past, it was expected that couples would be married before they lived together and those who cohabited without marrying were often subject to a lot of criticism.
Fortunately, attitudes have changed a lot since then and, according to Legal & General, the number of unmarried couples living together increased by 144% between 1996 and 2021.
The prevalence of unmarried, cohabiting couples has given rise to the myth of “common law marriage”. You may have heard that once a couple has lived together for more than two years, they enjoy the same rights and benefits as those who are married or in a civil partnership.
This is a misconception that often leads to financial difficulties, especially where estate planning is concerned. Fortunately, once you’re aware of these hurdles, you can take steps to overcome them.
Here are three unique estate planning challenges that unmarried couples might face.
1. Your assets might not be distributed in the way you intended on your death
When creating an estate plan, one of your main priorities may be ensuring that your assets are distributed according to your wishes when you’re gone.
If you pass away without a will, your estate will be divided according to the rules of intestacy. A spouse or civil partner will typically inherit much of your estate under these rules, with the rest being shared between children or grandchildren.
However, if you’re not married or in a civil partnership, your children or grandchildren, if you have any, will likely inherit your estate. Otherwise, your assets may be passed to other family members such as your parents or siblings.
Crucially, your partner won’t receive anything automatically under the rules of intestacy.
That’s why it’s important to create a detailed will outlining your wishes. You may also need to update your estate plan when you reach certain life milestones such as buying a new home or having children. This will ensure that your wishes are fulfilled when you’re gone, and your partner isn’t overlooked.
2. Your loved ones could pay more Inheritance Tax on your estate
Mitigating the Inheritance Tax (IHT) that your loved ones pay is another benefit of creating a robust estate plan.
In 2024/25, you can pass on up to £325,000 to your loved ones without IHT. This is known as your “nil-rate band”. You may also benefit from up to an additional £175,000 “residence nil-rate band” when passing your main home to a direct descendant such as a child or grandchild.
If you’re married or in a civil partnership, you can pass your entire estate to your loved ones without IHT, and they also inherit your unused nil-rate bands. This means that couples could pass on up to £1 million between them before IHT is due.
Unfortunately, if you’re not married, your partner may pay IHT on the portion of your estate that exceeds the nil-rate bands. They won’t inherit any unused allowances from you either. Consequently, unmarried couples may find it more difficult to mitigate IHT.
Further to this, you might be more likely to pay IHT in the future as chancellor Rachel Reeves recently announced that the nil-rate bands will remain frozen until 2030. Meanwhile, the value of your estate could increase if house prices rise, and you see growth on your savings and investments. This means that a larger portion of your estate could exceed the threshold, meaning your family pays more IHT.
The chancellor also revealed that pensions would no longer be exempt from IHT from April 2027 onwards, potentially making it harder to reduce a large bill.
Fortunately, we can help you explore ways to reduce the IHT liability of your estate such as lifetime gifting or trusts.
3. Your partner may not benefit from your pensions when you’re gone
During retirement, you and your partner will likely draw income from your personal pensions and the State Pension to fund your lifestyle. It’s important to consider what happens to your pensions after you’re gone, and if your partner can benefit from them.
Unfortunately, if you’re not married, your partner won’t inherit any of your State Pension payments when you pass away.
You can normally pass your personal pensions to your partner but they are not covered by your will. Instead, you’ll need to fill out a separate expression of wish form with your provider to nominate a beneficiary for each of your pensions.
This document isn’t legally binding and, ultimately, the trustee of your pension decides who inherits the remaining funds. Normally, they will follow the instructions in your expression of wish form. However, if you don’t fill out this crucial document, the trustee makes the decision themselves.
If you’re married or in a civil partnership, the trustee may assume that your partner is the most obvious beneficiary. Yet, if you’re not married, your partner could be overlooked and pension benefits might go to another family member instead.
Even if your partner does eventually inherit the pension, they may have to engage in a lengthy discussion with the trustee to demonstrate that they are the most logical beneficiary. This could create additional stress while they are grieving.
Fortunately, you can often fill out an expression of wish form online or over the phone. Alternatively, you may contact your pension provider and request a physical form. Completing this simple document won’t take long but it could help to ensure that your partner is financially secure when you’re gone.
Get in touch
If you’re part of an unmarried couple, we can support you with estate planning.
Please get in touch or email us at advice@mlifa.co.uk for more information.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of current HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.