Love is in the air at this time of year, and research shows that ten percent of proposals take place on Valentine’s Day. But in between the excitement and the romance, what’s important when it comes to marrying your finances together?
No one wants to burst their blissful bubble by talking about inheritance planning, healthcare and financial plans, but I wouldn’t be doing my job if I didn’t point out just how important those conversations are. When it’s no longer just puppy love, and you’re an adult with responsibilities and accumulated assets, then you need to approach the financial side of your partnership with the same seriousness as you would a business decision.
Communication is key
The first step to doing that has got to be to talk openly about your finances. Once you understand where you’re both starting from, you can make informed decisions about your future. Knowing the other person’s financial situation is wise, because once you tie the knot, it’s not just your futures that join. Your credit scores will also be linked as both your reports will be considered in financial moves that you make as a couple.
You should also discuss your goals and characteristics such as your attitude to risk. You might find that these things don’t perfectly match up, and that’s ok. If your views are wildly different it might not suit you to invest your money as a couple, but actually to keep your investments separate so you can each keep your personal style and goals.
However, if you do keep individual investments, it’s important to still maintain an overall view of your finances together. Your financial planner can advise on whatever set-up works for you both individually, but still review your joint finances as a whole.
The limits of love
Bizarre as it sounds, marriage and civil partnership can deliver some good tax planning opportunities for you both. If your partner is in a lower tax band, then you can transfer savings and investments into their name to reduce your income tax bill. You can also jointly purchase investments, such as property, and divide the income. If this is something you’re interested in, your financial planner can explain how it works and whether it could benefit you. They say that sharing is caring, but when it comes to your tax allowances, it could result in saving! Everyone has individual tax limits, but once you’re married, certain investments and property can be freely transferred between you without any capital gains tax or inheritance tax becoming due.
Investments – everyone has a capital gains tax allowance which is a limit on the amount of profit you can make from selling assets before you pay tax on the gain. By transferring assets into your joint names you can both make use of your tax-free allowance, so that up to £22,600 of any gain will be tax free when you eventually dispose of them.
Pensions – There are two limits on how much you can pay into your pension. These are:
- Annual allowance (AA) – this is the maximum amount you can save into your pension each year without incurring a tax charge.
- Lifetime allowance (LTA) – this currently sits at £1 million and is a limit on the amount of benefits that can be built up in a pension before you have to pay an additional tax charge when more than that limit has been paid out. From 6 April 2018, however, as the Chancellor confirmed in his Autumn Budget, the lifetime allowance will increase to £1,030,000.
If you’re approaching either of these limits there could be an opportunity to make use of your partner’s allowances and redirect your savings into their pension.
Beware though; it isn’t always moonlight and roses. Any transfer to a partner, or jointly contributing to a significant purchase or investment, should always be carefully considered. It’s worth seeking advice in advance to make sure you understand what would happen if you were to split up.
Planning your future together
Whether you’re just starting out on your future together, or are expecting something gold for your next anniversary, it’s likely that finance will play an important role in your relationship. And although most of us talk about money regularly, it can still be an emotive topic. Having a financial planner to guide you can make it a lot easier. They can clarify your situation, define your separate goals and cut through the complexity that comes with saving tax.
Wedding vows often involve a promise to love each other in good times and in bad. This vow works when it comes to investing as well, as in markets, just like relationships, there will be ups and downs. Things do change, but as your life together passes through different stages, try to remember to keep your financial plan up to date.
If you have any questions about anything covered in this blog, your 1825 Financial Planner will be happy to help. You can also join the conversation on LinkedIn or Twitter.
Laws and tax rules may change in the future. The information here is based on our understanding in February 2018. Personal circumstances also have an impact on tax treatment. Investments can go down as well as up and you may get back less than you paid in. The information in this blog or any response to comments should not be regarded as financial or tax advice.