International Charity Day is on 5th September and this year to mark the occasion, our team completed a sponsored charity walk. Did you know that charitable giving is a tax-efficient way to use your hard-earned wealth? But can you leave your pension to charity and, if so, how do you arrange this?
Leaving money to a charity can be complicated if you decide to draw from your pension, but there are ways of organising gifts. If you are likely to reach retirement with surplus money in your pension and you would like to make a charitable gift, let’s look at your options.
Donations through PAYE
Planning how to use your pension should start before retirement. Some people might be able to make donations using their pension while they’re still working.
If you’re 55 years or over, you could make regular donations through the PAYE process. Known as ‘payroll giving’, you can donate money tax-efficiently from your gross income. The deducted tax goes to the charity, and this can be an attractive option for higher and additional rate taxpayers.
As you would need to take the benefits from your pension, your pension provider must agree to this. You would also need to go through an authorised payroll giving agency, but there are only around 20 in the UK.
Donating from a pension scheme
Taking money from a pension to use for a charitable gift falls under the same rules for any type of withdrawal. Pension schemes have a list of authorised payments, which is unlikely to include a payment to a charity. Unauthorised payments would incur tax charges by HMRC.
Most pension providers will not facilitate charitable donations from pensions. There is an organisation called ShareGift, which allows investors to donate to charities. You could also set up a charitable trust and appoint the Charities Aid Foundation to manage this for you. But we would recommend seeking professional advice before proceeding with any of these options.
Donate from death benefits
It is possible to arrange a ‘charity lump sum death benefit’. This would pay your nominated charity a tax-free lump sum from your pension after you die. This is exempt from the current lifetime allowance, which is due to be abolished in April 2024. You can only arrange this type of donation if you have no dependents, which includes a spouse, civil partner, or children under 23 years.
Another way to donate using your pension death benefits relies on age factors. When someone dies aged under 75, there are no restrictions on how the lump sum can be used. The sum would be tax-free, but the lifetime allowance would apply; this is currently £1,073,100. You no longer pay a charge, but income tax will apply over this amount. For those over 75 who have died, there is a 45% tax charge and no lifetime allowance limit.
Charitable giving and financial planning
Philanthropy is a great way to give back to society and those in need. Many people choose a charity that has some personal meaning to them or their family. Before you consider leaving some or all of your pension to charity, it’s important to think about the most tax-efficient way to do this.
Instead of a pension donation, you could leave a charity legacy from your estate in your Will. You would need to name the charity in your Will, which needs to be legally binding. Giving money to charity is a great way to reduce your inheritance tax (IHT) liabilities. If you leave 10% of your estate to charity, it reduces IHT from 40% to 36%.
If you are looking to donate to a charity from your pension, speak to our financial planning team for advice. We will review your pensions and advise you on suitable tax-efficient strategies and charitable gifting options.
Our chosen charity this year is The Trussell Trust, and we’re taking part in their annual ‘Step Up September’ fundraising event. Throughout this month, our team will be completing a 30-minute walk each day to help raise money. If you want to sponsor us, see our donation page.
If you need a pension review, get in touch to speak to our financial planners.