Pensioners living together in tax break dilemma

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NEW ANALYSIS from insurance group Royal London has found that hundreds of thousands of older couples who live together but are not married are set to miss out on tax breaks and state pension rights as numbers have almost trebled over 13 years.

While it is still common for younger couples to choose to live together without getting married, the analysis suggests it’s a growing trend for older people, who are often unmarried because of being widowed or divorced.

More than 300,000 over-65s in England and Wales now live together without tying the knot but they are still considered ‘second class citizens’ as they are not entitled to some pension and inheritance tax benefits, the report said.

The proportion of older cohabiting couples aged between 65 and 69 years old trebled from 1.5% to 4.5% between 2002 and 2015, according to Royal London’s analysis of official figures.

It also rose from 0.7% to 2.3% among those aged 70 and over. That is higher than overall cohabiting rates, which have risen by a third (from 7.5% to 10%) since the turn of the century.

All unmarried couples have few of the rights enjoyed by those who are married or in civil partnerships. Older couples are more exposed to be financially vulnerable because of their age when it comes to inheritance tax and pensions.

For example, married couples can pass wealth to their surviving spouse free of inheritance and can transfer any unused portion of their inheritance tax threshold to their spouse. However none of these options apply to cohabiting couples, Royal London said.

Married couples are also allowed to pass on a family home worth £1million free of IHT, but cohabiting couples are excluded from this new concession, which has been recently introduced for residential property.

Meanwhile, older couples who reached pension age before the new state pension was introduced last year also miss out on some pension perks.

Under the previous pension system, widows or widowers have certain rights to inherit their spouse’s state pension, but these do not apply to cohabiting couples.

As an example, an older married woman could see her state pension boosted by around £2,500 per year following the death of her husband, but a cohabiting partner would miss out, Royal London said.

Personal finance specialist at Royal London, Helen Morrissey, said: “With each passing year more and more people are choosing to live together as couples, and it is amongst those over pension age where the growth has been the most dramatic.

But individuals need to be aware that there are many tax breaks and state pension advantages which apply only to married couples.”

She added there should be a review of whether the tax and benefit system needs to be updated “to reflect the world in which we now live, not the world of the 1940s”.

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