How does cohabitation affect your pension?

At the recent Conservative party conference, Theresa May announced that legislation would be altered to allow mixed sex couples in England and Wales to form a civil partnership.

While the choice to be married, in a civil partnership or living together as cohabitees is a personal one, it should be noted that, at least from a pension perspective, cohabitation carries certain disadvantages.

Defined benefit schemes

Defined benefit pension schemes often have very rigid rules in terms of death benefits.

A survivors pension will be typically paid out on death of the scheme member to a spouse, civil partner or dependent child. It will usually not be paid to a cohabitee.

In addition, a lump sum death benefit may be payable if the deceased dies before retirement. This can usually be paid to anyone that the member has nominated. However, there may be additional restrictions if the person nominated is not a spouse or civil partner.

Finally, even when a scheme does allow a cohabitees’ pension, if they only did so from a certain date, benefits will be calculated from that point in time.

For example, a scheme member died in 2018 with 25 years’ service and the scheme allowed cohabitees’ pension from 2015. In such a case, the cohabitees’ pension would be based on 3 years of service, not 25.

Defined contribution schemes

The pension freedoms rules that came into effect during 2015 brought the opportunity for full flexibility for defined contribution scheme members in relation to death benefits.

However, this does not mean that all defined contribution schemes offer this flexibility.

In the case of defined contribution occupational schemes, they might only offer lump sum benefits that are payable to whoever the member nominates, irrespective of relationship status. Any annuity/income option may only be available for dependents.

In some cases, a cohabitee may be covered if they are financially dependent on the scheme member. However this is not always the case and is dependent on the scheme trustees.

Action point

Action point

As you can see from the above, pension rules can be complex. Knowing how your specific scheme operates is so important.