At first glance, pensions are a totally individual affair. Most people have their own pension account and contribute towards it. But like many things in life, retirement finances are deeply shaped by relationships. As we move to a society where more people choose to cohabit rather than marry, when it comes to pensions, does being married actually make a difference?
Here is a summary of what you need to know about how marriage affects pensions.
Building up your pension pot and taking an income
Most Brits are putting money into a pension, whether it’s through their job or a personal plan they’ve arranged themselves. Typically, only you and your employer can add to it. However, some couples choose to share their finances and help top up each other’s pension pots, especially if it makes sense for their household.
When you take an income from your pension it is paid directly to you, although you could choose for it to be paid into a joint account.
Splitting couples
If a married couple divorce, then the pension should be considered as part of the divorce settlement. Often the owner gets to keep it, while the other partner gets different assets in exchange. But sometimes that’s difficult to do, so in certain cases the pension is divided, with a new pension fund set up in the other partner’s name.
If you’re not married but are sorting out your finances after a break-up, it’s worth remembering that pensions can be a big part of your wealth. However, unlike married couples, you can’t split the pension pot between you, so it’s important to factor this in when making financial decisions.
Inheriting pensions
When one partner dies that has a big effect on the household finances. So, it’s important to know what pensions you can ‘inherit’ – whether you are married or not. Here is the general position – but the golden rule is check with your own pension provider, as some pension schemes may operate differently.
- State pension – the new state pension – which started in April 2016 – belongs only to you, and your partner cannot inherit it. But they may be able to inherit some additional state pensions built up under the old system before April 2016 if you were married.
- Death benefit lump sum – some pension schemes pay a lump sum on death, often based on a multiple of salary. These are usually paid to a person you nominate, which could be a spouse or a partner, or someone else.
- Defined benefit pensions – these pay an income based on the number of years you have worked and your salary. Public sector pension schemes are nearly always defined benefit schemes. When you die, part of your pension should continue to be paid to your spouse or partner. For most schemes it won’t matter if you are married or not.
- Annuity – some people choose to buy an annuity with their pension pot on retirement. This pays a guaranteed income for life. When you buy the annuity, you can choose to add on other benefits such as continuing payments for a certain period or a return of a lump sum on death, or for some income to continue to another person. Again, it shouldn’t matter if you are married or not and your partner could receive these.
- Return of a pension pot – if you have an unused pension pot when you die, either because you did not access your pension or you were in drawdown, then you can nominate someone to receive that money. Again, that could include a partner or a spouse or civil partner. Currently under most pension schemes trustees have a duty to make sure those who were financially dependent on the member are looked after.
What about inheritance tax and pensions?
Currently, pensions are not included in the estate when working out if inheritance tax (IHT) is due. But this is changing from April next year. From then if you leave your unused pension pot to your spouse or civil partner it will be exempt from IHT. But if you leave it to your unmarried partner then it may get caught for IHT.
IHT won’t affect most people, but if you think you have enough money in your pension and wider estate for IHT to apply, then you may want to think about how you can reduce the amount of tax your partner will pay. A financial adviser can help you work through this.
Things to think about:
- Your pension pot belongs to you, but you may be able to inherit part of your partner’s. Most inherited pension payments aren’t determined by if you are married or not.
- Make sure you and your partner complete an expression of wishes form to nominate who you want to receive your pension pot on death.
- If you have a large estate and pension, think about implications of bringing pensions into the IHT net. Only spouses and civil partners will be exempt from paying this tax – an unmarried partner may have to pay IHT.
Rachel Vahey: Head of Public Policy
Rachel is AJ Bell's Head of Public Policy. She helps financial advisers and planners understand the changing pensions and savings environment, as well as how new legislation and regulation affects them and their clients.
Rachel...
These articles are for information purposes and should only be used as part of your investment research. They aren't offering financial advice, so please make sure you're comfortable with the risks before investing. Tax benefits depend on your circumstances and tax rules may change.
