PensionsJul 6 2021

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
  • 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
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How to make a charitable donation from a pension
Pexels/Skylar Kang

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.

Pension savings in excess of the lifetime allowance are subject to a lifetime allowance charge, which is applied at a rate of either 25 per cent, if the funds are designated to provide an income, or 55 per cent, if they are used to pay a lump sum.

There are some options available to those who want to limit the amount of their pension which could fall subject to the lifetime allowance charge. Members can still apply for Fixed or Individual Protection 2016, but not everyone will meet the strict eligibility criteria.

For those who have already accessed some of their pension, the withdrawal of drawdown funds can reduce the amount of excess in the scheme to be tested at age 75 under BCE5A. However, withdrawals are subject to income tax, and moves the money into the member’s estate if it is not spent, which could lead to an inheritance tax liability. 

Gifting assets directly to charity seems like it would be a straightforward solution. It would also be helpful for members who have pension investments which they are unable to sell or transfer, which can limit their ability to transfer their pension or take benefits.

Unfortunately, unless there can be certainty that an investment is worthless, under current pensions legislation there is no scope to do this as an authorised payment. If an asset which is gifted away has any value, it would be treated as an unauthorised payment, with significant tax charges for the member.

Nevertheless, despite the limitations of pensions legislation, there are still a few options available to those who are keen to donate part of their pension to charity. 

Lifetime gifting 

Payroll giving is not just limited to salary or wages. Members who are receiving a pension income via PAYE may also be able to make use of payroll giving to make donations to charity.

As with payments from salary or wages, the deduction is made before tax. The deduction is then paid to a Payroll Giving Agency which pays the funds to the member’s chosen charity. 

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