Charity gifts from pensions: key considerations

Introduction

With upcoming changes to inheritance tax (IHT) from April 2027, more clients are reconsidering how their pension benefits are passed on. For those wishing to support charitable causes, pensions can provide a uniquely efficient route. The key is to understand the rules that determine when charitable gifts from pensions are tax free.

1. Gifts from pensions can reduce tax exposure

Clients with pension funds they are unlikely to need may consider leaving part of their pot to charity. Doing so can reduce the portion of the estate exposed to IHT – particularly valuable as pensions will soon be included in the estate for IHT purposes.

2. Charity lump sums can be tax free

Charity lump sum death benefit rules allow benefits to be paid tax free if key conditions are met.

Main point: The member must personally nominate the charity during their lifetime and must have no surviving dependants at the time of death.

These rules mean that, for married couples, it often makes sense for the pension to pass first to the surviving spouse and then be nominated to charity on second death.

3. Comparing gifts from the estate vs the pension

Main point: Giving from the pension can reduce double taxation for deaths after age 75. If a gift is made from the free estate, the estate value subject to IHT falls – but more stays in the pension, potentially triggering both IHT and income tax for beneficiaries if the member dies after age 75. Using the pension to make the charitable gift instead can significantly reduce this combined tax burden.

4. When the charity lump sum death benefit rules do not apply

Even if the strict rules aren’t met – such as when a dependant survives or no nomination was made – the payment to charity is still exempt from IHT. However, the income tax position differs.

• Death under age 75: the payment is tested against the remaining death benefit and lump sum allowance; tax applies only if exceeded.
• Death over age 75: a 45% tax applies to the entire lump sum. This makes following the rules especially important for older members wanting to maximise the benefit to charity, not HMRC.