The best financial planning tips for unmarried couples

Attitudes towards relationships have transformed in the last few decades and as it has become more socially accepted, an increasing number of couples are choosing to forgo getting married.

According to the Office for National Statistics (ONS), the proportion of adults who have never been married or in a civil partnership increased from 26.3% in 1991 to 37.9% in 2021.

There are numerous reasons why couples choose not to get married including the cost of a wedding, a dislike of the institution, or simply the fact that people are less likely to pass judgement on them than they may have been in the past.

While it is positive that you have more freedom to make your own decisions about marriage, it is important to consider the financial implications of your choice.

Indeed, couples who are married or in a civil partnership enjoy certain financial benefits that unmarried couples don’t. As such, you may need to plan accordingly to ensure that you can both meet your long-term financial goals.

Read on to learn some of the best financial planning tips for unmarried couples.

1. Create a will and update it regularly

If you are married or in a civil partnership, your assets automatically pass to your spouse or civil partner when you die. However, the same is not true for cohabiting couples, despite what many people assume.

According to the UK government, 46% of people surveyed in England and Wales believed in the idea of a “common law marriage” and thought that they would automatically inherit their partner’s estate, even if they weren’t married.

This is a common misconception and you have no legal right to inherit your partner’s assets if you are not married or in a civil partnership. As such, it is crucial that unmarried couples have a clear will in place and update it regularly.

If you do not have a will, your estate will likely be divided according to the laws of intestacy and your surviving partner may not inherit anything from you at all.

Fortunately, by keeping a clear will and updating it whenever your circumstances change, you can ensure that your estate is divided in the way that you intended when you die.

2. Consider Inheritance Tax and estate planning

In his Spring Budget, chancellor Jeremy Hunt announced that the Inheritance Tax (IHT) “nil-rate bands” – the amount you can pass on without triggering an IHT charge – will be frozen until at least April 2028.

Unfortunately, this could mean that your family are more likely to pay IHT on your estate when you die. Indeed, according to FTAdviser, HMRC collected £3.9 billion in IHT between April and September 2023 – an increase of £400 million on the same period the previous year.

As such, you may need to explore ways to potentially reduce the IHT that your family pays, and this can be more challenging for unmarried couples.

If you are married or in a civil partnership, your spouse can inherit your estate without an IHT charge. Additionally, they also inherit any unused nil-rate bands – £325,000 plus £175,000 “residence nil-rate band” when passing on your main residence in the 2023/2024 tax year.

Consequently, the surviving spouse can potentially pass on up to £1 million without IHT when they die.

Yet, if you are not married or in a civil partnership, you can’t do this. You may have to pay IHT when inheriting your partner’s estate and you won’t benefit from any unused nil-rate bands.

Fortunately, there are other ways to potentially reduce IHT such as lifetime gifting or using trusts. However, you may need to consider your estate plan now and seek some professional advice to ensure that you can tax-efficiently pass on as much of your wealth as possible.

3. Fill out an “expression of wishes” form

Your pension is not normally covered by your will and you must fill out an “expression of wishes” form with your provider to choose who inherits it when you die.

Unfortunately, in 2022, MoneyAge reported that 72% of UK adults had never completed this simple piece of paperwork.

Ultimately, the decision about who receives the death benefits from your pension rests with your pension provider. Normally, they will follow your expression of wishes form but if you have not named a beneficiary, it is up to them to decide.

If you are married or in a civil partnership, they will likely choose your spouse or civil partner. However, if you are unmarried, they may not choose your partner, even if you wanted your pension to go to them.

You can usually fill out your expression of wishes form online and it is a very simple piece of paperwork that could ensure your wishes are fulfilled when you die.

4. Take advantage of joint planning opportunities

Couples who are married or in a civil partnership enjoy certain financial planning benefits that unmarried couples don’t. That said, there are still plenty of joint planning opportunities that every couple, whether they are married or not, can take advantage of.

For instance, you both have your own ISA allowance and Personal Savings Allowance. If you spread your wealth between you to ensure that you use both of your allowances, you may be able to increase the amount you save or invest tax-efficiently.

Additionally, you could benefit from contributing to one another’s pensions to increase your retirement savings and maximise the tax relief you receive. For instance, if you are a basic-rate taxpayer and your partner is a higher-rate taxpayer, you may want to contribute to their pension first as they will typically receive 40% tax relief on contributions, while you receive 20%.

It’s important to recognise that even though you aren’t married and don’t have all the same tax benefits, you still have these excellent opportunities for joint financial planning.

5. Consider a cohabitation agreement

When two people get married or enter a civil partnership, any assets acquired together become matrimonial assets. If the couple splits up, there is a clear legal process by which they divide their assets again.

However, if you are not married, this legal framework doesn’t exist. This can mean that couples are not clear about who owns which assets and how things should be handled if they separate.

As such, it may be useful to discuss how you want to arrange your finances with your partner and put a cohabitation agreement in place. This legal document outlines the assets and financial obligations of each party and how everything should be divided if you split up.

The main benefit of doing this is that you can decide together how you want to approach your joint finances and discuss your long-term goals, so you are both on the same page.

Get in touch

Unmarried couples may face some unique financial planning challenges, so we can help you achieve your goals.

Please give us a call on 01276 855717 or email today.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

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 results.

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.

Approved by the Openwork partnership on 10/11/2023