Pensions  

How to make a charitable donation from a pension

  • Describe the challenges of making charitable donations out of one's pension
  • Explain the advantages of making charitable donations
  • Identify some of the tax issues involved
CPD
Approx.30min
How to make a charitable donation from a pension
 Pexels/Skylar Kang

Despite the challenges of the pandemic, charitable giving has remained strong in the UK.

In their October 2020 UK Giving and Covid-19 special report, the Charitable Aid Foundation found that the proportion of people who donated to charity was broadly in line with previous years, with donors making larger than usual donations.

This resulted in an increase of nearly £800m being donated to charity between January and June 2020 when compared to the same period in 2019.

In this article, you will learn about the reasons why someone may want to make charitable gifts from their pension savings, the options available for making a donation to charity in life and after death, and the pension rules governing such payments.

Why gift to charity from a pension? 

Although simply giving cash is the most popular way for people to donate to charity, there are many ways to gift tax-efficiently, both during an individual’s lifetime and after death.

Payroll giving allows an individual to have donations to charity deducted from their gross pay. This provides an immediate saving to income tax, with the full amount going to the charity. 

Alternatively, donations using Gift Aid allow the charity to claim tax relief on cash donations at a rate of 25p for every £1 given. This boost comes at no extra cost to the individual, although they must have paid the same amount or more in tax during that tax year.

Those that pay tax above the basic rate can also claim the difference between the rate they pay and the basic rate on the donation.

In addition, all charitable gifts made during a person’s lifetime are exempt from inheritance tax. On death, if your client leaves at least 10 per cent of their net estate to charity in their will, any inheritance tax that does fall due on the remainder of their estate is charged at a reduced rate of 36 per cent, rather than the usual rate of 40 per cent. The portion gifted to charity is also exempt, so this can be an effective way of reducing the value of an estate for inheritance tax purposes.

This is just a flavour of the options available. With so many avenues for donating to charity from non-pension funds already, and the not insignificant tax savings which can be achieved by doing so, you may ask why would someone want to make a donation from their hard-earned retirement pot?

For many, pension wealth makes up the majority of their household wealth. The Office for National Statistics reported that for the period April 2016 to March 2018, 42 per cent of total household wealth was made up of private pension savings. Pension money may therefore appeal to scheme members as a seemingly convenient source from which they can support their chosen charitable causes. 

The lifetime allowance can also be a concern. The March 2021 Budget locked in the lifetime allowance at £1,073,100 until 2026, so an increasing number of people will have pensions that exceed this limit.