A pensions win for unmarried couples

Millions of unmarried couples could be in line for improved pension rights. David Prosser reports.


A landmark victory for unmarried couples
(Image credit: Nick David)

Millions of unmarried couples could be in line for improved pension rights following a landmark Supreme Court ruling that Denise Brewster, a lifeguard from Coleraine in Northern Ireland, should benefit from the pension contributions made by her partner before his death. Judges ruled that Brewster had been illegally discriminated against when Northern Ireland's local government pension scheme decided that she was not entitled to a survivor's pension following the death of her partner, Lenny McMullan, in 2009.

Brewster and McMullan had lived together for ten years and owned a house together. McMullan had paid into the scheme for 15 years, but the scheme's trustees argued its rules stated only married couples were entitled to receive each other's pension benefits when one partner died.

The Supreme Court's ruling that this decision was unlawful could have significant implications for the six million unmarried couples living together in the UK today, who currently face a patchwork of occupational pension scheme rules on pension rights in both the public and private sector. An increasing number of pension schemes now automatically recognise unmarried partners, although they have varying definitions of what constitutes a couple. Some schemes require evidence that a couple have been together for a minimum period that they've lived together for at least two years, for example while others may demand proof of financial interdependence, such as a joint bank account.

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In other cases, schemes may ask members to submit "nomination forms", setting out who they would like to benefit in the event of their deaths. In the absence of such a form, some schemes give their trustees more discretion than others to make payments to individuals such as an unmarried partner. An additional problem is that some schemes have limited discretion in how benefits are paid to unmarried partners: they may only be able to offer a lump-sum payment, rather than a regular income, which can leave the surviving partner facing an unnecessary tax liability.

Unmarried couples therefore need to check the terms of their pension schemes carefully to ensure both partners are properly protected particularly as some legal questions have still to be resolved. For example, the Supreme Court decision does not set out whether the ruling should be applied retrospectively for other unmarried couples. And since Brewster brought the claim under human rights legislation that applies to the actions of the state including public-sector pension agencies it does not necessarily have the same standing on private-sector schemes.

How cohabitees can lose out

Pensions aren't the only area where unmarried couples are potentially vulnerable to different treatment under the law. In the absence of a will, for example, there's no automatic right for one partner to inherit the assets of the other, as is the case when couples are married. Nor do unmarried survivors always qualify for state benefits, such as bereavement payments.

The tax system also treats unmarried couples differently. Assets left by one spouse to another are generally exempt from inheritance tax, but unmarried couples do not benefit from this concession. Nor do they have the right to transfer assets of any value between themselves without having to worry about capital-gains tax, as is the case for married couples. And last April, the government introduced the marriage allowance, a special tax break that enables some married couples to reduce their joint income tax bills.

While these discrepancies remain in place, unmarried couples should take them into account when planning their finances. Some couples have even drawn up "cohabitation agreements" that attempt to formalise how their family finances will be organised.

David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.