We’re currently doing a lot of planning work with clients whose financial situations have changed greatly in the last 18 months. As part of this process, we’ve taken a little bit of time to stop and reflect on some of the changes to their lives in general, how these might impact their future and how these changes feed through into their financial plans. We’ve noticed a number of themes emerging.

We are resilient as a species, but we are very dependent on each other

We’ve had a global pandemic, but the human race has come together to fight it as best we can. We’ve seen scientists across the world building an understanding of Covid and numerous drug companies creating the all-important vaccines. As individuals, we’ve realised that we’re only as strong as those around us. Where people refuse to wear masks, don’t socially distance and ignore health guidelines, we all pay the price.

The recovery of our economies is going to take similar resilience, collaboration and the best economic minds. Hopefully as economies recover and thrive again, the stock markets will also push on, to the benefit of your pension funds and investments.

Some have been impacted more than others

This is a sad fact of the pandemic, but there is no doubt that some people have been significantly impacted, while others have been relatively untouched. It has sometimes seemed a bit of a lottery as to how different people have been affected in terms of health, career, job security and financial impact.

As a result there is no “one size fits all” solution for people’s financial plans. With some clients it’s a case of continuing to grow. For others, a review of goals and ambitions is needed, accompanied by a tweaking of their plan. For people badly impacted in the past year, we’ve had to fundamentally review their plans and plot a new course of them. Every plan is different.

Uncertainty is an uncomfortable dimension of life

Covid has wreaked a trail of uncertainty; will I or a family member get Covid / Long Covid, how sick will we be, when can I go on holidays, when will I be able to reopen my business, what happens when the support schemes end etc. For most of these questions, there is no definitive question, so we muddle along as best we can.

However you might not have the luxury of just muddling along when it comes to your finances, and this demonstrates the importance of a robust financial plan that has been tested for unexpected events. We call these “What If” scenarios. When completing a lifestyle financial plan with our clients, we look at a range of scenarios and put in place solutions in case they should come to pass. Plans don’t remove uncertainty, but they definitely help you manage it.

Our health is the single most important factor in our lives

No surprise here, particularly after the last year or so. But we all used to rather blithely say that “your health is your wealth” without thinking too much about it or unless ill health had visited your family. Now we know how true this is, and that factors such as career or money fall quite far behind.

From a financial perspective, we have seen first-hand the importance of having adequate financial protection in place, whether this is Specified Illness Cover or Income Protection. They may appear to be unnecessary or a luxury purchase… until your health fails you and you need the financial support.

Control what you can control

You’ve no control over the path of the virus or the behaviours of others. You can only influence the factors that you control – taking the necessary health precautions and your own attitude to staying safe.

Likewise with your financial plan, you can control the amount of risk that you take, your investment timeframes, your spending habits and a number of other important levers. You’ve no control over the markets, changes to tax rates and the broader economic backdrop. Focus on the factors that you can control and make this central to your financial plan.

This includes your financial behaviours, which have been all-important over the last 18 months. This period has been a rollercoaster, with the market dropping sharply by more than 30% in Quarter 1 2020, before rising by more than 70% over the rest of the year, and continuing to rise strongly in 2021. We saw the importance of leaving your emotions at the door, not succumbing to fear and not panicking as the market fell. Those who did, paid a heavy price in missing the recovery. Build a robust plan, commit to it and shut out the short-term noise.

The last year or so will live in our memories forever. Use these memories to build a brighter financial future for yourself and your family.  

We decided to write about this topic after listening to a very sad radio interview recently. It was with a father of three children, who had recently been bereaved after the death of his life partner of 20 years, the mother of his children. She passed away as the result of a medical condition, that was further complicated when she contracted Covid-19.

The couple had lived together for most of those 20 years, and for all intents and purposes, they were like any traditional family unit. They just never got married. What struck a chord with us was the unfairness that was caused as a result of their cohabiting status. The deceased partner was also the breadwinner, which further exacerbated their situation.

This situation is now becoming all too common. At the last census in 2016, there were over 150,000 co-habiting couples in Ireland, a 6% increase on the previous 2011 census figure. About one in eight couples in Ireland are cohabiting without having formally exchanged their vows.

The bottom line is… if you are cohabiting, get expert financial advice. Cohabiting couples face a number of financial challenges that are unique to them, some of which can be mitigated. While the following should not be considered advice, it hopefully will give you a sense of some of the areas to be considered.

The Background

In 2010 the Civil Partnership and Certain Rights and Obligations of Cohabitants Act was enacted. This Act conferred rights similar to those of a married couple on registered civil partners and qualified cohabitants. The rights extended though are different for both.

Registered civil partners now have automatic rights to each other’s estates on death. This automatic entitlement was not extended to cohabiting couples, who instead must apply for a provision out of the deceased’s estate under a redress scheme.

As a result, cohabiting couples need to get expert financial advice and implement solutions, in order to avoid inheritance tax bills in the future.

The family home

As cohabiting couples are not treated for tax purposes in the same way as married or civil partnership couples, the death of one partner could result in a sizeable tax bill for the surviving partner. First of all, cohabiting couples should make themselves aware of the qualification conditions for Dwelling House Relief, which potentially allows a complete exemption from Inheritance Tax and Capital Gains Tax. Meeting these conditions could result in a significant tax saving on the death of a partner, so planning is very important.

The State Widow / Widower’s Pension

The Widow's, Widower's or Surviving Civil Partner's (Contributory) Pension is a weekly payment to the husband, wife or civil partner of a deceased person. This payment was formerly called the Widow's/Widower's (Contributory) Pension. To qualify you must, of course, be a widow, widower or surviving civil partner. This was a significant challenge to the subject of this article, as his deceased partner was the earner. He had no entitlement to a pension based on her social insurance contributions.

Mortgage Protection

There is a potential tax liability for the survivor on the death of their cohabiting partner, as their Inheritance Tax Threshold (the amount on which you don’t pay tax) is only €16,250.

Should the conditions of Dwelling House Relief not be met, if one partner alone bought the house and subsequently died, their surviving partner’s tax liability could be based on the full value of the house (less the threshold amount) – a very sizeable bill.

Arranging mortgage protection on a joint life basis might give rise to a potential tax liability, as could the inheritance of the property itself.  Solutions to be considered include,

• Increasing the amount of life cover to cover the inheritance tax liability
• Taking out a “life of another” policy
• Taking out a section 72 policy to specifically pay the tax

We suggest strongly that you seek advice to find the very best solution for you.

Personal & Family Protection

As cohabitants have no automatic rights to their deceased’s partners assets, unless they have a will in place the proceeds of a life assurance contract could simply end up in the hands of the deceased’s next of kin. This can be avoided by the policy being structured correctly. Again your specific circumstances need to be examined, in order to identify the optimal route so that on your death, your assets end up with your intended beneficiary and in the most tax efficient way possible.  There are important considerations around the type of policy to be used and who pays the premium, in order to ensure the most tax efficient solution.

Small gift exemption

In Ireland the small-gift exemption is a really useful wealth transfer tool. It allows anyone to gift up to €3,000 in any tax year to anyone else with no attaching tax liability.

Cohabiting couples can use this exemption very effectively where one partner is financially dependent on the other. In order to avoid a liability for inheritance tax on a policy, it is crucially important that the person who will benefit from the policy actually pays the premium from his or her own means. If they don’t have means and their partner pays the policy, they are liable for inheritance tax on the death of their partner. The small gift exemption can be used to transfer wealth to the partner without means, who can then use this to pay the premium. This will enable the policy owner to pay the premium where he/she doesn’t earn an income.

 We hope you now have a flavour of some of the important issues that cohabiting couples need to consider in relation to their personal finances. However this is just a snapshot of some of the issues, and certainly should not be considered as advice. We will be delighted to talk you through your specific situation, and help you ensure you avoid any nasty surprises at a later stage.