Early retirement? Pensions and cohabiting couples – ‘rights’ and reform

Posted: 21/10/2024

Whilst pensioners received a boost to their retirement income in April 2024, when the State Pension increased by 8.5%, there is less positive news for those born after 5 April 1960. The State Pension age is rising, with a gradual rise to 67 for those born on or after 5 April 1960, and a gradual rise to 68 between 2044 and 2046 for those born on or after 5 April 1977. The International Longevity Centre UK’s report in February 2024 also gravely predicts that the UK will have to increase its State Pension age to 71 by 2050.

Now, more than ever, people are relying on private pensions to generate sufficient income to allow them to retire at an age comparable to generations before them. However, as highlighted in our International Family Law Report: The Cohabitation Conundrum, an alarming number of unmarried couples may be in the dark about their lack of entitlement to their partner’s pension on death or divorce, leaving those financially dependent on their partners facing an uncertain retirement.

Pensions and divorce

When a married couple divorce, the parties’ pensions are considered alongside the other financial assets in the marriage for division. As with all ‘marital’ assets ie assets built up during the marriage, the starting point is that they will be split equally. Given that, for many families, the pension pot can be the most significant asset alongside the family home, this provides important protection for people who have been financially dependent on their spouse. It is not uncommon for one party, usually the wife, to suffer relationship generated disadvantage when, for example, they have given up work and sacrificed their career and potential earning capacity to raise children and / or support their spouse’s career.

Pension sharing orders, which enable the division of pensions between divorcing spouses, provide a much-needed safety net for many wives who have been financially reliant on their husbands throughout their marriage. That said, interactive investor’s Great British Retirement Survey 2023, which surveyed 9000 people, found that two-thirds of divorcees had not discussed pensions during divorce proceedings, with three-quarters of divorced women surveyed admitting to not discussing pensions as part of their settlement, compared to 56% of divorced men. In reality, despite pension sharing orders being an option on divorce for decades, they remain surprisingly rare, indicating that even where legal mechanisms are in place to protect one party on retirement, economic disadvantage remains.

If one spouse dies, the surviving spouse may be able to inherit or increase their State Pension depending on whether the surviving spouse reached State Pension age after 6 April 2016 and the amount of National Insurance contributions they have both made. They may also be entitled to payments from their spouse’s private pension scheme.

Pensions and separation for cohabitants

In contrast, unmarried cohabiting couples have no automatic right to the other’s pension on separation. Whilst private pension schemes do tend to contain specific rules allowing certain individuals, which can include an unmarried partner, to be named as a ‘nominated beneficiary’ for a benefit following death, the vast majority of private pensions do not provide a benefit on death specifically for cohabiting partners. Likewise, there is no entitlement to share the State Pension, even if the cohabiting couple have children together.  

In addition, cohabitees have no automatic rights to any of each other’s assets if they separate. Similarly, they are not entitled to financial support for themselves: only maintenance which ends once a child reaches the age of 16 (or 20 if in full-time education or vocational training).

There is a legal mechanism (under Schedule 1 to the Children Act 1989) for a former cohabitee with a child/children to make a claim against the other parent to provide a home for them to live in with the child/children. The huge downside to this legislation is that the property will only ever be held ‘on trust’ to benefit the child/children while they are minors. As such, the home will usually revert back to the other parent once the youngest child reaches 18.

Accordingly, a former cohabitee with a child/children who is approaching retirement age will already have experienced:

• the loss of child maintenance; and
• potentially the loss of their home once the children have reached majority.

This will be compounded by a further drop in income on retirement. Bearing in mind that former cohabitees do not have the benefit of spousal support to enable them to retrain and get back into the workplace, there is often little opportunity after a relationship fails to build up their own pension fund.

Most alarming is the persistent belief of many unmarried couples that ‘common law marriage’ exists and that they have the same rights as married couples. As highlighted in our International Family Law Report: The Cohabitation Conundrum, cohabitation is the fastest growing family type in the UK, and more than half the children born in England and Wales in 2021 were born to mothers who were not married or in a civil partnership (Office for National Statistics 2022). Many unmarried women decide to give up work or reduce their working hours after having children, or have no other option due to eyewatering childcare costs, and it is evident that many women are making life changing decisions without fully appreciating the potential financial consequences.

Reform: global models

Whilst it is clear that better education is needed to inform cohabitees of their limited rights so that they can make informed decisions about their finances, the campaign for law reform in England and Wales to give separating unmarried cohabitants legal rights continues to gather pace. The Labour Party indicated that a Labour government would reform the law for cohabiting couples. Although no such reform is yet underway, it is early days for this government and there is a possibility that, in the coming years, cohabitees could be afforded rights akin to married couples. With this in mind, how other jurisdictions treat unmarried couples upon separation could give some insight into how the law could change in England and Wales.

The sixth edition of the Blue Book - Family Law: A Global Guide, which has recently been published, highlights the vastly different approaches taken by jurisdictions when dealing with separating cohabitants. For example, in Australia the rights of cohabitants are largely equal to married couples. Under the Family Law Amendment (De Facto Financial Matters and Other Measures) Act, which came into effect in March 2009, cohabitation is a factor of a de facto relationship, namely two people of the same or opposite sex who are not married (or related) but are a couple living together in a genuine domestic relationship. Once a de facto relationship has been established, a court can make an order or declaration under the act if one of a number of further grounds has been satisfied.

Such factors include the duration of the relationship (a couple must have lived together for more than two years), or if there is a child of the de facto relationship. De facto partners are then largely entitled to the same rights as married couples, including the splitting of pensions. The different legal framework and its consequences for international couples are highlighted in our case study in the International Family Law Report: The Cohabitation Conundrum (p.13).

Similarly, in Ireland, the Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010, which came into force in January 2011, established a ‘safety net’ scheme for certain cohabiting couples in order to protect economically dependent or vulnerable parties on the breakdown of a long term cohabiting relationship (due to either separation or death).

In order to make a claim, the parties must have resided together in an intimate relationship for five years, or two years if there is a child of the relationship, and the claiming partner must show financial dependency. Whilst the orders available to qualifying cohabitants are less extensive than those available to spouses, it is possible to apply for pension orders. It is also open to cohabitants to opt out of this statutory regime by entering into a cohabitants' agreement. This is important, as unmarried cohabiting couples should have the opportunity to agree their own financial arrangements in the same way that married couples can enter into pre- and post-nuptial agreements in order to regulate their finances in the event of a divorce.

Cohabitation agreements

In England and Wales, unmarried couples are able to enter into cohabitation agreements, which record each party’s rights and responsibilities, whilst also setting out arrangements for finances, property and children both while they are living together, and if they separate or die.

Whilst it is sensible for couples considering living together to enter into a cohabitation agreement, particularly if they are planning to have children, it is not possible for it to provide for pension sharing on separation.

An agreement can be set out designating who should be named as a ‘nominated beneficiary’ for a benefit in a private pension scheme following death. However, nominations can be changed, and as Alison Hills, head of the pensions team at Penningtons Manches Cooper, points out:  

“It is important to remember that, typically, a nomination of a beneficiary is not legally binding on a pension scheme. It is an expression of a member’s wishes which a scheme can take into account but usually there is no legal obligation for the scheme to accept the nomination.”

Although cohabitees cannot use cohabitation agreements to provide for pension sharing on separation at the moment, if in the future automatic pension claims were available to cohabitees on separation, cohabitation agreements, like in Ireland now, might also be used to allow couples to opt out of a regime of automatic claims.  

The way forward

Given the societal shift towards cohabitation, there is a real danger that, in the absence of better education or legal reform, an alarming number of separated cohabitees could find themselves in a retirement trap, where they have no access to a sufficient private pension as a result of relationship generated disadvantage, but are too young to receive the State Pension and too old to work.

If reform is forthcoming, it will be interesting to see how the measures strike a balance between protecting these economically vulnerable cohabitants who remain largely unaware of the lifelong financial ramifications of not tying the knot whilst, on the other hand, respecting the positive choice made by those who make a conscious decision to opt out of marriage for wealth protection reasons.

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