Combined finances for couples
‘All that I have, I share with you.’ Married couples make this vow – but what does it really mean in practice?
Living with a spouse, civil partner or just a partner will nearly always mean a degree of shared financial responsibility. This may be anything from simply sharing out the costs of housekeeping, to having fully combined finances where ‘What’s mine is yours’.
Which way is better? That depends on your own financial attitudes, but also on your financial compatibility with your partner (i.e. how similar are your partner’s attitudes).
Here are some of the ways you may combine your finances with your partner, and some of the advantages and disadvantages of doing so.
The most common way to combine finances is with a joint mortgage – if only because it’s hard to afford a mortgage by yourself. This has many advantages: you can pool your savings to raise a bigger deposit, which can mean a smaller mortgage and also a better deal with lower interest rates.
A joint mortgage also carries risks, however. If your partner can’t (or doesn’t) keep up their share of the repayments, you will be liable for the whole cost (or else lose the property). Also if you contribute different amounts (whether to the deposit or the repayments) it may be worth seeking legal advice so you can agree how the property would be shared out if you were to separate in the future.
The credit score of each partner may also play a role. This cuts both ways: someone with a poor credit score should find it easier to borrow if their partner has a good one, while the high-scoring partner will find their borrowing power goes down.
Your credit card(s)
A joint credit card is a popular and simple way to combine much of your finances, while leaving some areas separate. The main advantage here is being able to keep track of your joint expenditure without combining bank accounts.
The main risk here is letting the debt get out of control, so with a joint card you should make it a priority to pay off the balance in full every month.
If one partner has a better credit score then it may make sense for them to be the primary cardholder. This may result in a card with more favourable terms, from which both partners can then benefit. That said, the partner with the lower score should still have their own personal card and pay off the balance in full each month, as this will improve their credit score.
A joint bank account
Some couples choose to have a joint current account. This can help to keep track of incomings and outgoings, making it easier to manage finances overall. It can also prevent disputes over who pays for what, and reduces the risk of missing bill payments (since everything is handled in one place).
A joint account works best when both partners have similar attitudes to spending and saving. It may also make sense in cases where one partner earns much more than the other, to prevent a sense of unfairness developing.
The risk of a joint account is that it depends on trust, and on mutually agreed spending habits. If one partner has a significantly different attitude to money, separate accounts may be best. Alternatively, you could have a joint account for essential spending, plus a separate private account each.
Financial planning perks for couples
The marriage allowance
One small perk for marriage couples is the marriage allowance. If one spouse has earnings below the basic rate income tax band, they can transfer £1,150 of their personal allowance to their higher-earning spouse or civil partner. This can trim their overall tax bill by up to £230 in that tax year. It’s not much, but it’s a couple of nice meals out.
If you have stocks and shares, it’s best to keep them in an ISA if you can. If you’ve used up your personal ISA allowance for the year, remember that your spouse has an allowance too. If both are used up, you have another safety buffer: you each have a capital gains tax (CGT) allowance. You can transfer assets to each other without incurring a tax bill, so you can make full use of both CGT allowances. Also remember there are lower and higher rates of CGT (check yours, as it can be quite complex). If you can ensure that the lower-rated partner makes the excess gain, then your tax bill will be lower.
If one spouse is a higher-rate taxpayer and the other a basic-rate taxpayer, you may be able to make good use of this. For instance, if you also have a buy-to-let property, then the income from this is taxed at the owner’s highest rate. Transferring sole ownership into the name of the basic-rate taxpayer could potentially save a lot of money. The same applies to other sources of taxable income.
Saving into pensions
If one spouse is a higher-rate taxpayer and the other a basic-rate taxpayer, then it could make financial sense for the lower-rated partner to pay into a pension in their spouse’s name. This will double the tax relief, resulting in a much larger final pension pot. However, you will need to engage a solicitor to secure pension rights for the lower-earning spouse in the case of a split.
If your spouse has purchased a joint-life annuity, then this will continue to pay a guaranteed (if reduced) income to you if your spouse dies before you do. Similarly, if your spouse has bought a guaranteed annuity, then this will keep paying out to the end of the guaranteed period even if your spouse dies before then.
If you have an ISA, you can pass on its tax-free status to your spouse when you die. You spouse inherits a special ISA allowance for that year alone, up to the value of the original ISA, so the money can stay sheltered from tax.
How financial advice can help couples
One of the biggest causes of relationship problems is a lack of ‘financial compatibility’. Independent financial advice can help to prevent such disagreements over money, by recommending an approach that suits you both. So when you see a financial adviser, make sure you go together and talk at length about your priorities as a couple. This should give you a clear and unbiased financial plan that addresses both your needs and personalities equally.
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