Provided you're completely, totally sure that the income provider in your household won’t get ill, or walk out, or be made redundant, your family finances will probably be fine. But can anyone really be sure of that? The last thing you want in the middle of a crisis is to be wondering how you will pay the bills. So make sure you know what you have and what you need...
Sit down with your partner, get a pen and paper, and go over the following topics in detail. They’re things you really need to know.
If you get ill/walk out/get made redundant or – worse – die, how do we pay the bills for the next three months?
‘You’ll be fine’ is not enough. You need to know where the money will come from for the mortgage, household bills and expenses. Your partner may well have this in cash, but it’s no use to you squirrelled away in a savings account in their name. You need access.
Joint accounts are usually the best option. If money is in joint accounts, you have ready access. On death, it will usually pass to the surviving account holder, outside the terms of the deceased’s will, so there is no need to wait for the grant of probate (which can take time). Keeping three months of expenses in cash gives you some breathing space to sort out other arrangements.
You need a pension in your own name. You may have a high-earning spouse with a company pension, but that leaves you reliant on their largesse to get your hands on that income in later life (unless you divorce, in which case your pensions will probably be split).
Creating a pension in your own name has a number of tax advantages – high earning partners can use the pensions allowances of low earning partners. Equally, at retirement it means two tax free allowances and, usually, less income tax. Just as importantly, it gives the lower earning partner a fall-back position later in life.
Also, it’s worth noting that if you take maternity leave you may miss out on a whole load of pension contributions from your employer. Your partner should really be making up the difference. Those contributions, snowballing over time, make a real difference to your pension pot.
You don’t automatically get the state pension; you need to have accumulated 35 years’ worth of national insurance payments. For someone who takes time out of the workplace to care for children, it isn’t always easy to bridge the gap.
These credits can accumulate through the childcare benefit system. However, anyone with a partner earning over £60,000 is subject to the ‘high income child benefit tax charge’. They claim the benefit and the state takes it all away in tax through their self-assessment return. Many conclude that they shouldn’t bother claiming benefit at all. The problem is, this means they don’t accumulate any credits and it may leave them short when it comes to claiming the state pension. Check your credits here.
Is their stuff definitely coming to you? When you’re grieving the loss of your life partner, it’s no fun to find out that actually they hated you and have left everything to the cat’s home. Far better to find that out before they die, so you can do something about it.
The same goes for their pension statement of wishes. Pensions sit outside an estate for inheritance tax. That means that they aren’t governed by your will and the owner of the pension needs specifically to state who will benefit. They are usually the second largest asset after your family home, so make sure your partner has made their intentions clear.
Life insurance and death in service benefit protects you if your partner dies. They pay out a lump sum that could pay off the mortgage or provide a long-term income. It is worth asking whether the life insurance is written in trust; setting up a trust arrangement means the proceeds from the policy can be paid directly to beneficiaries, rather than becoming part of your estate and therefore being chargeable to inheritance tax (not a problem if you are married, but a potential problem if you’re not).
Assets that are jointly owned – your home, savings and investments – usually pass to the other person, avoiding the need for probate. For a house, that means owning it as ‘joint tenants’. If the house is owned as ‘tenants in common’, you could find your partner’s family on the doorstep coming to claim their share.
You are ‘joint and severally’ liable for any debt taken out in joint names – overdrafts, credit cards, loans, mortgages and so on. That means if your partner can’t pay or disappears, they’ll come to you for the cash.
These are gloomy conversations, but your well-being and that of your children could depend on having the answers. No matter how much you trust your partner, don’t leave it to chance
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