MoneyAge Mortgage Awards

3 million couples set for ‘multi-billion pound windfall’

Written by Adam Cadle
12/02/2018

Three point three 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. However, 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/Widowers in occupational pension schemes – provision for ‘survivors’ in occupational pension schemes has historically been geared around married couples and, more recently, civil partners; if millions of opposite-sex couples could register as civil partners, the gains could easily run into billions of pounds.

Income tax – ‘Marriage Allowance’ – Since April 2015, most married couples and civil partners have been entitled to a tax allowance worth £230 per year in 2017/18. The gains if all cohabiting couples were eligible and claimed the allowance would be around £750m (3.3 million couples times £230). Even if only 1 in 3 of today’s cohabiting couples registered for a civil partnership and was eligible for the allowance, the gain would still be around £250m.

Bereavement benefits for those of working age – under current rules, when one person in a cohabiting couple dies, their surviving partner is not entitled to National Insurance benefits for bereavement. In 2016, Royal London estimated that such couples were missing out on around £82 million each year as a result. If they were allowed to register a civil partnership they would come within the scope of these benefits. The Bereavement Support Payment is currently paid at two rates – a higher rate (for those with children) comprising a lump sum of £3,500 followed by a monthly payment of £350 for up to 18 months, or a lower rate of £2,500 with a monthly payment of £100 per month.

Inheritance tax (IHT) – married couples and those in same sex civil partnerships can pass their wealth to a 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 and same sex civil partners can transfer any unused portion of the new residential nil rate band, designed to help families pass on their home to direct descendants without tax. Although cohabitation rates amongst the elderly are relatively low, around 1 in 40 men aged 70 or over is cohabiting, and this proportion is rising every year, suggesting the number who could benefit from this rule change could grow significantly.

State pension – 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.

Royal London director of policy Steve Webb 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”